Date of Award


Degree Type


Degree Name

Doctor of Philosophy


The small firm or size anomaly is an observation that small firms, ranked by total equity value, earn abnormally large returns even after adjusting for systematic risk. The persistence of abnormal small firm returns appears inconsistent with efficient markets or traditional asset pricing models. Some explanations for the small firm anomaly relate to bid-ask spreads.;This thesis examines four areas in which the relative, or percentage, bid-ask spread influences small firm returns: bid-ask bias, transaction costs, year-end effects, and as a proxy for market liquidity.{dollar}\sp1{dollar} Tests use Canadian Toronto Stock Exchange data during 1977 to 1991. An advantage of this data is availability of spreads every day. Previous studies estimate spreads based on only a few days each year.;First, methods of calculating bid-ask bias and adjustments for it are examined. Them dummy variable regression tests investigate the empirical effects of bid-ask bias. Results confirm bid-ask bias causes part of the observed small firm anomaly. However, the impact of bid-ask bias on daily returns is less than previously estimated. Blume and Stambaugh's (1983) buy-and-hold portfolios overcompensate for bid-ask bias.;Next, dummy variable regression tests examine returns and spread transaction costs over daily to annual holding-periods. Tests also investigate seasonal year-end effects on spreads and returns. Results show bid-ask spreads prevent realization of abnormally high small firm trade returns{dollar}\sp2{dollar} over short holding-periods, including the year-end. Spreads widen by December, and remain wider than average until after the tax year-end. However, over holding-periods of six months or longer, small firms earn abnormal returns, even after spread costs.;Liquidity tests extend Amihud and Mendelson's (1989) model for a time-series relationship between spreads and returns. A market "liquidity beta" is estimated. Regression tests use pooled cross-section time-series and Fama-MacBeth methods. Results show the relative spread is not a good proxy for a "systematic liquidity factor" in expected returns. The influence on expected returns is limited to cross-sectional spread differences and changes in spreads, associated with transaction costs. ftn{dollar}\sp1{dollar}"Relative spreads" are calculated by dividing the difference between ask and bid prices by the mean of bid and ask. "Bid-ask bias" is an upward bias in security returns calculated from trade prices. It is caused by price variance, due to shifts of trades between bid and ask quotes. "Transaction costs" include the bid-ask spread and brokerage commissions. "Spread transaction costs" mean only the spread component. "Market liquidity" is the ability of an investor to trade a security at the quoted price. {dollar}\sp2{dollar}A one-period trade return is calculated by dividing the current trade price and dividend by the previous trade price, and subtracting 1.



To view the content in your browser, please download Adobe Reader or, alternately,
you may Download the file to your hard drive.

NOTE: The latest versions of Adobe Reader do not support viewing PDF files within Firefox on Mac OS and if you are using a modern (Intel) Mac, there is no official plugin for viewing PDF files within the browser window.