Investments, tenth edition

  The Small-Firm-in-January Effect 

  

The so-called size or  

  small-firm  effect,      

originally documented by Banz,  

23

   is illustrated in  Figure 11.3 . It shows the historical per-

formance of portfolios formed by dividing the NYSE stocks into 10 portfolios each year 

according to firm size (i.e., the total value of outstanding equity). Average annual returns 

between 1926 and 2011 are consistently higher on the small-firm portfolios. The differ-

ence in average annual return between portfolio 10 (with the largest firms) and portfolio 1 

(with the smallest firms) is 8.52%. Of course, the smaller-firm portfolios tend to be riskier. 

22

 Sanjoy Basu, “The Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A 

Test of the Efficient Market Hypothesis,”  Journal of Finance  32 (June 1977), pp. 663–82; and “The Relationship 

between Earnings Yield, Market Value, and Return for NYSE Common Stocks: Further Evidence,”  Journal of 

Financial Economics  12 (June 1983). 

23

 Rolf Banz, “The Relationship between Return and Market Value of Common Stocks,”  Journal of Financial 

Economics  9 (March 1981). 

0

5

10

15

20

25

1

2

3

4

5

6

7

8

9

10

Annual Return (%)

Size Decile: 1 = Smallest, 10 = Largest

19.38

16.64 16.35

15.70 15.01 14.91

14.40

13.37 12.71

10.86

 Figure 11.3 

Average annual return for 10 size-based portfolios, 1926–2011 

  Source: Authors’ calculations, using data obtained from Professor Ken French’s data library at   http://