The small firm effect in the Dutch stock market

Abstract

The phenomenon that small firms have higher risk-adjusted returns than large firms is known as the small firm effect. The main goal of this thesis is to give a waterproof statement about the existence of the small firm effect in the Dutch stock market. The research question is therefore formulated as follows: do small firms have higher abnormal stock returns than large firms in the Dutch stock market? The sample consists of all firms listed on the Dutch stock exchange Euronext Amsterdam from 2008 to 2021, divided into ten value-weighted yearly-adjusted portfolios. After the risk adjustment for the non-synchronous trading bias, stock returns are observed with an OLS regression based on the extended Three-Factor Model. The Three-Factor Model is extended with a liquidity factor and the dividend yield. The empirical results of this thesis indicate the existence of the small firm effect and the January effect in the Dutch stock market, but only for the smallest decile of firms. The smallest decile of firms in the Dutch stock market has persistently higher risk-adjusted returns than large firms, but the cause is still largely unexplained.