Size Effect and Cost of Equity

Abstract

Sofya Anatol'evna Fomkina - National Research University "Higher School of Economics"

The size effect still remains one of the mysteries of capital markets. This effect was first discovered by Banz (Banz, 1981) during the test of asset pricing model (CAPM) in the US market. This discovery led to further investigation of the issue in other developed and developing capital markets. However, until now in the scientific community there is no consensus about the real presence of this effect in capital markets and its magnitude. At the same time, the size premium is actively used in the practice of companies, funds and individual analysts for evaluating the cost of equityThis paper presents an overview of studies devoted to analysis of the size effect on developed and developing capital markets. We systematized and summarized different approaches of assessing the size premiums, compared the obtained empirical results and summarized possible explanations for this effect.In this study we also identified the features under the analysis of the size effect, discussed their causes, as well as the appearance of the effect, in general, in capital markets and its further disappearance in several countries.