ON THE ROBUSTNESS OF SIZE AND BOOK-TO-MARKET IN CROSS-SECTIONAL REGRESSIONS

We use a robust regression estimator to analyze the risk premia on siz e and book-to-market. We find that the risk premium on size that was e stimated by Fama and French (1992) completely disappears when the 1 pe rcent most extreme observations are trimmed each month. We also show t hat the negative average of the monthly size coefficients reported by Fama and French can be entirely explained by the 16 months with the mo st extreme coefficients. We argue that further investigation of these results could lead to an understanding of the economic forces underlyi ng the size effect, and may also yield important insights into how fir ms grow.