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Firm size and cyclical variations in stock returns

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  • Perez-Quiros, Gabriel
  • Timmermann, Allan

Abstract

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 analyse these implications empirically. Consistent with theory, small firms display the highest degree of asymmetry in their risk across recession and expansion states and this translates into a higher sensitivity of these firms' expected stock returns with respect to variables that measure credit market conditions.

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  • Perez-Quiros, Gabriel & Timmermann, Allan, 1999. "Firm size and cyclical variations in stock returns," LSE Research Online Documents on Economics 119113, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:119113
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    File URL: http://eprints.lse.ac.uk/119113/
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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