Editorial Type:
Article Category: Research Article
 | 
Online Publication Date: Dec 01, 2015

The Small Cap Premium: Where Is the Beef?

Page Range: 152 – 157
DOI: 10.5791/0882-2875-34.4.152
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Academics and practitioners in finance have long accepted the notion that small market capitalization stocks earn higher returns, after adjusting for risk, than large market capitalization stocks. They have often followed through by either investing in small cap stocks, hoping to earn these higher returns, or by augmenting the required returns (discount rates) for smaller companies with a “small cap premium” when valuing these companies. In this article I argue that these practices are misguided because the small cap premium is no longer supported by the historical data, does not seem to be priced in by investors in markets today, and is based on faulty intuition.

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Copyright: © 2015, American Society of Appraisers
Figure 1
Figure 1

Annual Returns by Market Cap Class From 1926–2014.

Source: Ken French’s online data

Figure 2
Figure 2

Small Cap Premium Over Time. Source: Ken French’s online data

Figure 3
Figure 3

The January Small Cap Effect. Source: Ken French’s online data

Figure 4
Figure 4

Implied ERP for S&P 500 on January 1, 2015.

Figure 5
Figure 5

Implied ERP for S&P Small Cap 600 on January

Contributor Notes

Aswath Damodaran is Professor of Finance at the Stern School of Business, New York, New York.