Small company bias Essay Example | Topics and Well Written Essays - 500 words

Small company bias - Essay Example The EMH maintained that a market was perfect in the sense that the information spread very fast to accommodate immediate changes in the market stock prices. However, key criticisms have been leveled against this hypothesis based on a number of contradicting scenarios. The use of small firm effect has sustained the opposition and criticism for the EMH. The extensive studies undertaken among the USA small firms indicated that small firms outperformed large firms in respect of stock prices in spite of their advantageous operational economies of capital and market dominance (Edgar 31-35). Investigators have found the strongest effect of the tendencies of small firms to generate large stock returns compared to returns on stocks of large companies. According to the survey carried out by Fanna and French (1992) on the stocks data between 1963 and 1990, they found that clearly, portfolios of small companies tended to produce higher monthly average returns that those made on stocks of large companies EMH (Jonathan, Jandik, and Mandelker, 17). Therefore, it is essential to examine the EMH from a wide perspective that attempts to explore the necessary information. according to EMH, the larger the firm, the more advantageous it is in accessing and retaining important market information hence resulting in information asymmetry, hence creating an ability to benefit from the skewed information compared to the small firms. It should be noted that although the results of the studies of small fir effect have tended to degenerate the meaningfulness and application of EMH, it might harbor significant flaws such as survivor bias where the researcher might have used data from small firms that survived the informational imbalances (Edgar 34). Since its inception about four decades ago, EMH has occupied a large space in economic literature. The researches on