Size Matters, if you Control Your Junk

The size premium has been challenged along many fronts: it has a weak historical record, varies significantly over time, in particular weakening after its discovery, is concentrated among microcap stocks, resides predominantly in January, is not present for non-price based measures of size, is weak internationally, and is argued to be subsumed by proxies for illiquidity. We find, however, that these challenges are systematically dismantled when controlling for the quality, or its inverse “junk”, of a firm. Across a wide variety of quality measures proposed in the literature a significant size premium emerges, which is: stable through time, robust to specification, more consistent across seasons and markets, not concentrated in microcaps, robust to non-price based measures of size, and not captured by an illiquidity premium. These results are replicated in 30 different industries and in 24 different equity markets. The resurrected size effect that controls for quality puts it on par with other anomalies such as value and momentum in terms of its economic significance.