Also known as the small-cap effect, this refers to a theory which states that shares of companies with smaller market capitalisation usually offer higher returns to investors than large-cap stocks. One of the reasons is that smaller firms generally have greater growth opportunities ahead of them, which in turn leads to a greater appreciation of their stock prices. The small firm effect was famously studied by Nobel laureate Eugene Fama and Kenneth French in their 1992 paper “The Cross-Section of Expected Stock Returns”.
