Size effect and the measurement of firm size

The size effect is mainly observed when firm size is measured by stock market value and absent when measured by firm's total asset, book equity, or total revenue. We argue that if the profitability shocks are neutralized on cross section, the Chinese equity market shows a significant size effect in ex ante expected returns no matter how firm size is measured. Moreover, the size premium measured by market value is indeed larger than those measured in other variables. We provide evidences that the value factor ( HML ) and the short‐term reversal factor ( LMW ) can moderate this extra premium.