Value Investing Equity Size Premium - Thoughts? |
| Equity Size Premium - Thoughts? Posted: 08 Feb 2019 10:00 PM PST Hi! Just curious what's your opinion on including an equity size premium on companies with micro/small market capitalization, specifically the size premium indicated by Duff and Phelps' Decile Size Premia Study. I noted that there are some opinion among academe and profession discouraging the use of size premium, e.g.: - http://quickreadbuzz.com/2017/02/15/shouldnt-add-size-premium-capm-cost-equity/ - http://aswathdamodaran.blogspot.com/2015/04/the-small-cap-premium-fact-fiction-and.html One of the things that I noted is that methodology of Duff and Phelps' size premium is relative to the whole market (NYSE), and that isolating micro/small-cap company returns to a small-cap index will eliminate/minimize the size premium (since required returns for small companies are naturally larger versus big companies). Now after considering the foregoing, let's tie it up with the one of the methods of determining the cost of equity (which is determining comparable companies that will help us in deriving subject company's beta), and with Duff and Phelps' Size Premia Table. If we put all these three together, do you think it is reasonable that if the comparable companies are also small-cap, we won't need to use a size premium? Or basically, should we use the size premium only relative to the comparable companies we are using? (i.e. not strictly using a specific rate for a specific market capitalization decile). [link] [comments]  |
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