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The resurrected size effect still sleeps in the (monetary) winter

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  • Simpson, Marc W.
  • Grossmann, Axel

Abstract

In this paper, we provide evidence that the size premium (SMB) is more significantly related to monetary policy than to firm quality or to business cycle troughs. Across both economic expansion and contraction periods, whether we control for firm quality or not, we show that monetary tightening eliminates the size premium and easing of policy re-instates it. We further demonstrate that the effect holds even outside of business cycle troughs as found by Ahn et al. (2019). The channels through which monetary policy affects small firms differently than large firms are identified, such as a stock market liquidity effect, a firm-level liquidity effect and increased access to credit. Our findings indicate that monetary policy is an important factor to consider when assessing the size premium, and apparently more important than firm quality, and the business cycle.

Suggested Citation

  • Simpson, Marc W. & Grossmann, Axel, 2024. "The resurrected size effect still sleeps in the (monetary) winter," International Review of Financial Analysis, Elsevier, vol. 92(C).
    • Handle: RePEc:eee:finana:v:92:y:2024:i:c:s1057521924000139
    DOI: 10.1016/j.irfa.2024.103081
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    More about this item

    Keywords

    Size premium; Factor models; Quality; Monetary policy; Liquidity;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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