The Size Effect Continues To Be Relevant When Estimating the Cost of Capital
In
this paper, I will review the size effect, potential reasons why one observes the size effect, and correct common misconceptions and address criticisms of the Size Premia (SP). Specifically, we demonstrate that the size premium critique by Cliff Ang2 is not warranted and that the alternative methodology proposed by that author is misleading and cannot be considered as an alternative to the Duff & Phelps' SP. Subsequently, we will highlight some methodological issues with his proposed alternative. The methodology the author is proposing is picking up the statistical errors that he was set to avoid by proposing the same methodology. I will discuss other criticisms we have encountered. Finally, I will provide some practical guidance on applying SP.
Low and Large Size Portfolios' Betas
Estimates of Beta over the Period June 1961 to June 2018 Using a Three-Year Moving Look-Back Period and an Expanding Look-Back Period Starting June 1926 for Low and Large Size Portfolios
Contributor Notes
Roger J. Grabowski, FASA, is a managing director with Duff & Phelps and an Accredited Senior Appraiser and Fellow (FASA) of the ASA. He has directed valuations of businesses, interests in businesses, intellectual property, intangible assets, real property, and machinery and equipment. Roger has testified in court as an expert witness on matters of solvency, the value of closely held businesses and business interests, valuation and amortization of intangible assets, and other valuation issues. Roger also teaches courses for the American Society of Appraisers, including Cost of Capital, a course he developed.