Do stocks in Australia confirm pervasiveness of the value premium and the size effect? In their August 2008 paper entitled “Size and Book-to-market Factors in Australia”, Michael O’Brien, Tim Brailsford and Clive Gaunt measure the value premium and the size effect in the Australian market. Using company-specific accounting information from annual reports and contemporaneous stock prices for 98% of all Australian listed firms during 1982-2006 (25 years), they conclude that:
- The mean (median) value premium for Australian stocks over the entire sample period is 0.75% (0.73%) per month, significantly different from zero. This premium is present for all size groupings but is strongest among the largest 60% of companies.
- The mean (median) size effect for Australian stocks is 0.35% (0.14%) per month, not significantly different from zero.
- Beta risk does not explain the value premium and the size effect in Australia. For example, growth portfolios across size groupings consistently exhibit higher betas than the corresponding value portfolios.
In summary, evidence indicates that the Australian stock market offers a strong value premium and a weak size effect.
