Is there a Swedish Size Effect? Controlling for Quality

Sammanfattning: Whether size affects a firm's expected return or not has been widely disputed in asset pricing literature. However, recent evidence suggests there is a size premium in the United States. Despite this, whether a size effect exists or not remains unclear in many countries, for example in Sweden. In our paper, we test if there is a size effect in Sweden, by replicating recent literature testing for a size effect in the United States when controlling for quality. We test for a size effect in Sweden through multiple linear regression of SMB, controlling for size-dependent differences in firm quality, market risk exposure, momentum and value. Our results indicate there is no statistically significant size effect in Sweden between 1995-2019, with an SMB alpha monthly mean of -0.03% (t-statistic -0.14), when controlling for the above factors. Additionally, we find a positive relationship between size and quality, as well as the presence of a consistent quality premium in Sweden. We believe this interaction of size and quality may have previously obscured the lack of a size effect in Sweden.