The inconsistency of small-firm and value stock premiums

This article examines the consistency of the small-firm and value stock return premiums using four alternative value stock criteria in each of four different decades; and across expansive versus restrictive monetary conditions. The results indicate that value stocks and small firms generally offer a premium, regardless of the decade considered or the measure used to define value, but the small-firm and value stock premiums differ substantially across monetary conditions. Strong small-firm and value stock premiums are identified in expansive monetary periods, while relatively weak or negative premiums appear in restrictive monetary conditions. Furthermore, during restrictive monetary periods, a Treasury bill portfolio outperforms the stock market average. The authors conclude that changes in monetary conditions play a prominent role in determining the return premiums investors earn.