Small Firm Effect Essay Example

Small Firm Effect Paper At last, a conclusion about whether or not to use this anomaly earn profit will be provided. Explanation of small firm effect and its methodologies Small firm effect refers to a situation which the average risk adjusted returns of smaller firms are higher than the larger firms Band(1981). This situation shows the insufficient of CAMP in predicting the stock returns and counter-argues the efficient market hypothesis Band(1981). It was found by researching the relationship between the return and market value of common stocks in the New York Stock Exchange. The researchers build a generalized asset pricing model which adds the variable market value of security to the capital assets pricing model Band(1981). The constant measuring the contribution of market value of a stock to the expected return of the stock was found as a significantly negative number for the all-time period Band(1981). This indicates that the larger the market values the smaller the expected returns Band(1981). Supporting evidence There are several evidences support the small firm effect as an anomaly counter- argues the efficient market hypothesis in relate to the capital assets pricing model. Under the efficient market hypothesis, no persistent excess profits can be earned on a stock by using public available information. However, the research done by Band(1981) proves that about twenty percent risk-adjusted profits can be earned by using strategy of taking long positions in a portfolio of smaller firms and taking short position in a portfolio of larger firms in a year. Furthermore, the researches done by Brown, Klein and Marsh (1983) shows that excess returns can be earned in related to firm size but the effect is not stable over time. We will write a custom essay sample on Small Firm Effect specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Small Firm Effect specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Small Firm Effect specifically for you FOR ONLY $16.38 $13.9/page Hire Writer Moreover, the study done by Kim(1983) also proves that there is a size related anomaly and its seasonality. Kim(1983) founds around fifty percent of abnormal returns related to firm size are earned in January, twenty-six percent are earned during the first trading week in a year and around eleven percent are earned in the first trading day. Small firm effect in different equity market The study done by Reengaging (1990) found that the relative price behaviors of larger and smaller firms on ETC stocks are different. The costs of trading for small stocks are different in different markets (Reengaging 1990). Thus, an analysis of the evidence for small firm effect in different equity market is important. Small firm effect not only happens in USA but also in the other countries. It has been proved existence in Australia by Brown, Kim, Klein and Marsh (1983). Furthermore, a study done by Chemung, Lounge and Wong (1994) on Korean Stock Exchange also proves the existence of small firm effect. In mean return analysis, the study shows the portfolio with smallest firm size got the highest average monthly return (Chemung, Lounge and Wong 1994). In risk-adjusted return analysis, they use the Sharpe-Lintier version of the two parameter assets pricing model to examine the influence of firm size and E/P ratio on the risk-adjusted portfolio returns (Chemung, Lounge and Wong 1994). The result shows the portfolio of small firms get the highest and only positive risk-adjusted returns (Chemung, Lounge and Wong 1994). Moreover, the small firm effect also exists in Belgium, Ireland, Japan, Mexico, Spain, Switzerland and United Kingdom (Hawaiian and Kim 2000). However, there are no significant relationships between firms size and returns in Canada and France and the size premium significantly different in different markets (Hawaiian and Kim 2000). Small firm effect in different time The researches done by Brown, Klein and Marsh (2001) on U. S. Stock market shows hat excess returns can be earned in related to firm size but the effect is not stable over time. Damson and Marsh (2001) believe that market anomalies apply to Murphys Law which if things can go wrong, it will eventually go wrong. That is, the excess return of small companies will eventually move towards reverse. They compared the stock return of small firms in the U. K. Stock markets with that in the U. S. Stock markets from 1955 to 1997. The study shows the stock returns of small firms were 6% higher than large firms during 1955 to 1986 then many founds Management Company launched between 1987 and 1988, followed a reverse on stock returns of small firms were 6% lower than the large firms from 1989 to 1997 (Damson and Marsh 2001). This may also be contradicts for the small firm effect. Reasons for existence of small firm effect Misprinting Some researchers explained the small firm effect as misprinting from the measurement or method error of assets price model, but Roll (1983) finds this is not the case. He believed that the frequency of trading and holding period can affect the beta estimates. The risks of small firm were undervalued and returns were overvalued for small firms in short holding period (Roll 1983). Furthermore, as small firms are traded not often, the daily stock returns were delayed, the risk was undervalued (Roll 1983). However, Reengaging (1982) use the method of aggregated coefficients to estimate the stock risks and finds undervalue of risks for small firms is not a strong evidence for small firm effect. The study done by Fame and French (1992) also shows firm size is better at explaining the excess returns on small firm than stock risks. Transaction cost The transaction cost for small firms are usually higher than that for large firms. Transaction cost includes direct cost and indirect cost. Indirect cost includes brokerage fees and bid-ask spread. Indirect costs include fees generated by information searching and portfolio management. Amid and Mendelssohn (1986) regard the bid-ask spread as representative of stock trading frequency. Larger bid- ask spread means market thinness. Then they built three models to test the relationship among stock returns, risk of stocks and bid-ask spread. The result shows relationship between stock returns and bid-ask spread are significant stronger than allegations between stock returns and risk of stocks at explaining the small firm effect (Amid and Mendelssohn 1986). Furthermore, Amid (2002) believed that expected market liquidity has a positive influence on ex-ante excess stock returns and return on stock is negatively related over time to contemporaneous unexpected liquidity. Liquidity has stronger influence on small firms (Amid 2002). Amid proved his hypothesis by examine stock in NYSE from 1964 to 1997. Less available information The third reason of existence of small firm effect is small firm has less available information. Theoretical research has proved that firms with less available information should, other variable remain unchanged, get higher returns to make up estimation risk (Manhattans). Thus, less average available information for small firms may be the reason of small firm effect. Nathan (1996) proved this hypothesis in his article. Different fundamental structure Different fundamental structure between large firms and small firms may be one of the reasons for small firm effect. Small firms in NYSE are less efficiently run and have higher financial leverage and these kinds of risks are not easy to be captured by arrest index compare to large firms (Chain and Chem. 1991). Thus the small firm should get higher stock return to make up the estimation risk. Exploit ability and limitation of profit-earning strategy This essay believes that small firm effect is not exploitable now. Somebody may argue that profit can be earned by taking long positions in a portfolio of smaller firms and taking short position in a portfolio of larger firms. In fact, it is hard to keep a portfolio with small shares which long and short position can be held and traded quickly in the real world (Bradford, Haney and Billion 2011). Furthermore, the transaction cost of take short position is larger than take long position (Bradford, Haney and Billion 2011). Moreover, the article written by Damson and Marsh (2001) points out excess return of small companies will eventually move towards reverse and their study shows stock returns of small firms were 6% lower than the large firms from 1989 to 1997 which indicate the small firm effect already move towards reverse in U. K.. Conclusion In conclusion, this essay does not recommend the fund manager use strategy of taking long positions in a portfolio of smaller firms and taking short position in a oratorio of larger firms to exploit as loss may occur.

The Age of Pericles and Periclean Athens

The Age of Pericles and Periclean Athens The Age of Pericles refers to part of the Classical Age of Greece, when the dominant polis- in terms of culture and politics- was Athens, Greece. Most of the cultural wonders that we associate with ancient Greece come from this period. The Dates of the Classical Age Sometimes the term Classical Age refers to the entire expanse of ancient Greek history, from the archaic period, but when used to distinguish one era from the next, the Classical Age of Greece begins with the Persian Wars (490-479 B.C.) and ends with either the empire-building or the death of the Macedonian leader Alexander the Great (323 B.C.). The Classical Age is followed by the Hellenistic Age that Alexander ushered in. Besides war, the Classical era in Athens, Greece, produced great literature, philosophy, drama, and art. There is a single name that signifies this artistic period: Pericles. The Age of Pericles (in Athens) The Age of Pericles runs from the middle of the 5th century to either his death at the start of the Peloponnesian War or the end of the war, in 404. Pericles as Leader While he was not a king or dictator in charge of Athens, Greece, Pericles was the foremost statesman of Athens from 461-429. Pericles was repeatedly elected to be one of the 10 strategoi (generals). Aspasia of Miletus Pericles was strongly influenced by Aspasia, a female philosopher and courtesan from Miletus, who lived in Athens, Greece. Because of a recent citizenship law, Pericles couldnt marry a woman who wasnt born in Athens, so he could only cohabit with Aspasia. Pericles Reforms Pericles introduced payment for public offices in Athens. Pericles Building Projects Pericles initiated the building of the Acropolis structures. The Acropolis was the high point of the city, the original fortifiable area before the city of Athens expanded. Temples topped the Acropolis, which was behind the Pnyx  hill where the assembly of the people gathered. Pericles preeminent building project was the Parthenon  (447-432 B.C.), on the Acropolis. The famed Athenian sculptor Pheidias, who was also responsible for the chryselephantine  statue of Athena, supervised this project. Ictinus and Callicrates served as architects for the Parthenon. Delian League Pericles is credited with moving the treasury of the Delian League to Athens, Greece, and using its money to rebuild the Acropolis temples that the Persians had destroyed. This was an abuse of the treasury funds. The money was supposed to be for the  defense of Athens and its Greek allies. Other Famous Men in the Classical Age Besides Pericles, Herodotus the father of history and his successor, Thucydides, and the 3 famous Greek dramatists Aeschylus, Sophocles, and Euripides lived during this period. There were also renowned philosophers like Democritus during this period, as well as sophists. Drama and philosophy flourished. The Peloponnesian War But then the Peloponnesian War broke out in 431. It lasted for 27 years. Pericles, along with many others, died of an undetermined plague during the war. The plague was especially deadly because people were crowded together within the walls of Athens, Greece, for strategic reasons connected with the war. Historians of the Archaic and Classical Period HerodotusPlutarchStraboPausaniasThucydidesDionorus  SiculusXenophonDemosthenesAeschinesNeposJustin Historians When Greece Was Dominated by the Macedonians DiodorusJustinThucydidesArrian fragments of Arrian found in PhotiusDemosthenesAeschinesPlutarch