An empirical analysis of small firm effect on A-share stock in Shanghai Exchange

Abstract

Although small firm effect has been tested for many years in various stock markets, there is still not a unified statement of this market phenomenon. This study aims to verify the existence of small firm effect (SFE) in the A-share stock market of Shanghai Stock Exchange during the period from January 2015 to May 2017. This research uses both the Capital Asset Pricing Model (CAPM) and the three-factor model to test the relation between firm size, BTM ratio, market risk, and stock returns. The result indicates that the CAPM can well explain the relationship between the excess stock return and firm size and display a small firm effect in Shanghai A-share stock market from 2015 to 2017. This result can be a reference to prove the existence of small firm effect in the Chinese stock market and work as guidance to help investors make better investment decisions.