THE INCONSISTENCY OF SMALL-FIRM AND VALUE STOCK PREMIUMS

This article examines the consistency of the small-firm and value stoc k return premiums using four alternative value stock criteria in each of four different decades; and across expansive versus restrictive mon etary conditions. The results indicate that value stocks and small fir ms generally offer a premium, regardless of the decade considered or t he measure used to define value, but the small-firm and value stock pr emiums differ substantially across monetary conditions. Strong small-f irm and value stock premiums are identified in expansive monetary peri ods, while relatively weak or negative premiums appear in restrictive monetary conditions. Furthermore, during restrictive monetary periods, a Treasury bill portfolio outperforms the stock market average. The a uthors conclude that changes in monetary conditions play a prominent r ole in determining the return premiums investors earn.