The North American Journal of Economics and Finance. of AAA members live and work outside the United States. ) . Average returns on small (low ME) stocks are too high given their β estimates, and average returns on large stocks are too low. ( Like the average returns in Tables I and II, the regressions in Table III say that size, ln(ME), helps explain the cross‐section of average stock returns. This improved description of the relation between average return and β is evidence that the β estimates for the two‐pass size‐β portfolios capture variation in true βs that is missed when portfolios are formed on size alone. Contrary to claims in the literature, we find that the Z2 statistic and Newey-West corrected Fama-MacBeth standard errors do not correct for both cross-sectional and time-series dependence. The size effect (smaller stocks have higher average returns) is thus robust in the 1963–1990 returns on NYSE, AMEX, and NASDAQ stocks. t / The average slopes for ln(ME) are close to the values in the univariate size regressions, and almost 4 standard errors from 0, but the average slopes for β are negative and less than 1 standard error from 0. This item is part of JSTOR collection Unlike the simple relation between β and average return, the univariate relations between average return and size, leverage, Thus, to be included in the return tests for July of year t, a firm must have a CRSP stock price for December of year P ME / For example, the post‐ranking βs for the 10 portfolios in the smallest size decile range from 1.05 to 1.79. Moreover, although the size effect has attracted more attention, book‐to‐market equity has a consistently stronger role in average returns. The standard errors of the βs suggest, however, that this explanation cannot save the SLB model. E t ME Even for the 1941–1965 period, however, the relation between β and average return disappears when we control for size. ln(ME). in average stock returns, at least during our 1963–1990 sample period. BE / , and we use its market equity for June of year t to measure its size. ( Does investor relations matter in the tourism industry? offsets a positive slope for 1971–1980 (0.82, On average, only about 50 (out of 2317) firms per year have negative book equity, BE. The univariate average slope for the lagged return is negative, −6 basis points per month, but less than 0.5 standard errors from 0. must proxy for risk. One possibility is that the variation in β produced by the β sorts of size deciles in just sampling error. The puzzle of the opposite slopes on In Their overreaction story predicts that 3‐year losers have strong post‐ranking returns relative to 3‐year winners. / / Learn about our remote access options. 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