The Relationship between the Size of Joint Stock Companies and the Yield of Their Shares

Abstract

The financial problems of the small firm have been a source of longstanding interest to economists. Usually, however, these problems have been discussed in terms of the cost of issuing capital, and small has been interpreted in a rather strict sense, perhaps an initial capital of less than ?250,000. It seems plausible to suppose, however, that if small firms are at a disadvantage in the capital market, this would show not only in high costs of making an issue, but in the relatively high yield of existing shares in small firms. Moreover, in view of the growing importance of institutional investors in the equity market, it seems likely that, if this disadvantage of small firms exists at all, it would extend considerably further up the size range than ?250,000. The object of this enquiry was, therefore, to examine the relationship between size and yield so as to test these two hypotheses. The first problem which arose was, of course, the selection of the sample of companies for investigation. It was desired to take account only of size and to exclude such factors as a bad past record, ignorance of a company on the part of the public and a virtually dormant market, except in so far as these depend on size. A random sample of all public companies would probably have given too much weight to these partly irrelevant influences, and it seemed better to concentrate on a group of firms with a reasonably good record, and wlhich had received at least their fair share of public notice. A convenient method of doing this was by reference to the Company Comments column of The Financial Times, and the attractiveness of this was enhanced by the fact that much of the information required was given in these comments, so that the work of extraction and calculation was considerably simplified. The method adopted was, therefore, to start with all the companies mentioned in Company Comments7 during the year from August 1954 to August 1955. We then excluded companies not primarily engaged in manufacture or trade within the United Kingdom, companies which did not declare a dividend during the year, and a small number for which we were not able to obtain all the information which we required. We were then left with a list of 553 companies, to which the subsequent analysis refers. We must emphasise, however, that the method of selection is by no means random, and is likely to include among the smaller firms mainly the more attractive and, therefore, lower yielding ones. In other words, the method of selection is one which is distinctly unfavourable to our hypothesis.