The Study On The Small Firm Effect Of China Stock Market

The research of "small firm effect" has attracted so many scholars in financial circle since Banz (1981) found the phenomena in American stock market. The study on "small firm effect" only started in our country and there is large research space in the field, which has become mature gradually overseas in past 20 years. It is of great significance to analyze "small firm effect" of China stock market and the economics implications behind it with overseas achievements for reference.The research includes six parts. The first is to test whether there is the "small firm effect" in China stock market. This part Measures firms' size with market value of float shares, and divides each portfolio into quintiles and deciles to choose an appropriate grouping method. The second part divides the sample into two sub-samples to tests the different performance of "small firm effect" in two periods. The third part tests different performance of each month. The fourth part studies the "small firm effect" in five industries, the industry, the commerce, the public utilities, conglomerates and the properties, and uses Fame-Macbeth method to research "the small firm effect" in the different industries. The fifth part analyzes the reason why the "small firm effect" exists in China stock market referring to the western explanation about "the small firm effect" and the character of China stock market. In the end, we provide some suggestion.The result implies that "the small firm effect" exits in China stock market, even if after risk adjustment. "The small firm effect" has different performance in different periods: the effect displays so obviously in the first period, but in the second period this effect almost disappears. "Small firm effect" is more obvious in March and August, but not in January. The effect performs differently in different industries, which is the most significant in the properties, the most insignificant in the public utilities. The paper suggests that the most important reason why "the small firm effect" exists in China stock market is liquidity risk, and merger and acquisition (M&A), shell resource's existence, investors' herd behavior also result in "the small firm effect" in our country, as well as the institutional defects of stock market.