The small firm and other confounding effects in asset pricing data: some evidence from Australian markets

In Australian markets, we seek to clarify the relationship of stock return performances with their beta, firm market capitalization and trading activity. Our study leads us to consider the possibility that asset pricing studies can be dominated by the stocks of the very small companies to the extent of having little relevance to institutional share management. For example, the paper observes how the pattern of returns for stocks of the very small firms leads to generalizations that are reversed in respect to the stocks of larger firms. Additionally, the study reveals how outcomes may be compromised by "reversals of causality" in the data, so that, for example, beta estimates may be the outcome, rather than the explanation of stock price performances. Overall, the paper finds that when the stocks of the very small firms are removed, stock returns have a positive relationship with firm capitalization, while bearing no pronounced relation to either of stock beta or trading activity.