The Reverse Size Effect: Intricate Relationship between Size and Quality in Sweden and the Nordics

Abstract: We examine the size anomaly in the Nordic countries with a particular focus on its largest individual market, Sweden. First, analyzing return patterns of market value sorted portfolios, we find that large stocks outperform small stocks in Sweden and the Nordics, leading to a reverse size effect. Extremes matter as focusing only on the smallest and biggest stocks reveals an enormous negative size premium. In addition, we find a strong seasonality pattern including a substantial January effect. Second, further investigating the recently identified interaction between size and quality, we examine the size effect in the presence of quality factors covering profitability, growth, safety and payout of a firm. We find that the size premium increases, however, it fails to prevail in terms of statistical significance. Moreover, controlling for quality mitigates the seasonality effects but is not able to dismantle the January effect. We find evidence that small stocks feature a high negative exposure to the quality factor and mainly drive the size effect. We discover challenges for asset pricing theory as a comprehensive six-factor model that also controls for size and quality fails to explain returns of small and particularly junk stocks.