One of the earliest reported anomalies in which the stock market did not appear to be efficient is called the small-firm. Effect. Many empirical studies have shown that small firms have earned abnormally high returns over long periods of time. Even when the greater risk for these firms has been taken into account The small-firm effect seems to have diminished in. Recent years but is, still a challenge to the efficient market hypothesis. Various theories have been developed to explain. The, small-firm effect suggesting that it may be due to rebalancing of portfolios by institutional investors tax issues,,, Low liquidity of small-firm stocks large information, costs in evaluating small firms or an, inappropriate measurement of. Risk for small-firm stocks.
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