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The Return of the Size Anomaly: Evidence from the German Stock Market


  • The author would like to thank the anonymous referee, John Doukas (the editor), Gishan Dissanaike and Geoff Meeks for their helpful comments and insights. I would also like to thank Simon David and conference participants at the EFMA meeting 2009, at the London Business School, at Warwick Business School, and at the University of Cambridge, for constructive suggestions. I am responsible for remaining errors.


This paper examines the size effect in the German stock market and intends to address several unanswered issues on this widely known anomaly. Unlike recent evidence of a reversal of the size anomaly this study documents a conditional relation between size and returns. I also detect strong momentum across size portfolios. The results indicate that the marginal effect of firm size on stock returns is conditional on the firm's past performance. I use an instrumental variable estimation to address Berk's critique of a simultaneity bias in prior studies on the small firm effect and to investigate the economic rationale behind firm size as an explanatory variable for the variation in stock returns. The analysis in this paper indicates that firm size captures firm characteristic components in stock returns and that this regularity cannot be explained by differences in systematic risk.

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