Practitioners commonly augment the CAPM cost of equity by adding the Size Premium in Excess of CAPM published in the Ibbotson and Duff & Phelps yearbooks. However, the empirical evidence following Banz's paper in 1981 does not support the existence of a size premium. Moreover, even if a size...

In this paper, I evaluate whether there is a size effect that is relevant to the cost of equity. I first analyze what model investors use to determine the required rate of return on their investment and find investors prefer the Capital Asset Pricing Model (CAPM) over other models, even those...