Financial Analysts Journal

Disentangling Size and Value

  1. Robert D. Arnott

The finance community has published thousands of articles about the size effect, the value effect, and other “Fama-French factors.” But size is typically defined by market capitalization, which is a product of the size multiplied by some measure of growth, such as P/E. So, capitalization is a tangled combination of size and growth. Moreover, when the analysis of other market anomalies are cap weighted and partitioned by value versus growth, size and style become interconnected in ways that undermine the measurement of the anomalies. When the size effect is separated from the value-versus-growth effect, size as measured by market cap is seen to be far less powerful than is generally believed and the value effect becomes more powerful and more consistent than generally believed.

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