Firm Size and Cyclical Variations in Stock Returns


  • Gabriel Perez-Quiros,

  • Allan Timmermann

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    • Federal Reserve Bank of New York, and University of California, San Diego, respectively. We thank Justin McCrary and Shawn Cole for excellent research assistance. An anonymous referee and the editor, René Stulz, provided numerous suggestions that greatly improved the paper. We are grateful to Wouter den Haan, David Marshall, and seminar participants at the University of Aarhus, the University of California, Santa Barbara, and Washington State University for discussion and comments. The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.


Recent imperfect capital market theories predict the presence of asymmetries in the variation of small and large firms' risk over the economic cycle. Small firms with little collateral should be more strongly affected by tighter credit market conditions in a recession state than large, better collateralized ones. This paper adopts a flexible econometric model to analyze these mplications empirically. Consistent with theory, small firms display the highest degree of asymmetry in their risk across recession and expansion states, which translates into a higher sensitivity of their expected stock returns with respect to variables that measure credit market conditions.