Dixon, Seth

The small-firm effect is a well-researched topic that defies fundamental financial market theory. Though there are many studies on presence of the small-firm effect, few investigate the reasoning behind it. This study tests 577 stocks in 2019 to determine if the small-firm effect can be explained by differences in financial metrics commonly used by investors. Though we find that market capitalization has an inverse relationship with asset turnover, market capitalization has a positive and negative relationship, respectively, with return on assets and cash conversion cycle. We find that revenue growth, free cash flow growth, return on assets, and market capitalization all have a positive effect on returns. Though we find that asset turnover is higher for small-firms, it does not make a difference on returns. In contrast, return on assets is lower for small-firms is positively correlated with returns, possibly explaining the reversal of the small-firm effect in our sample.