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A Direct Test of Roll's Conjecture on the Firm Size Effect
Author(s) -
REINGANUM MARC R.
Publication year - 1982
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1982.tb01093.x
Subject(s) - econometrics , conjecture , economics , estimation , beta (programming language) , test (biology) , empirical research , mathematics , statistics , demographic economics , combinatorics , computer science , management , geology , paleontology , programming language
Empirical research indicates that small firms earn higher average rates of return than large firms, even after accounting for beta risk. Roll conjectured that the small firm effect might be attributed to improper estimation of security betas. The evidence shows that while the direction of the bias in beta estimation is consistent with Roll's conjecture, the magnitude of the bias appears to be too small to explain the firm size effect.