Over the period from 1927-2010, the smallest decile of U.S. stocks outperformed the largest decile by 10.4 percent annually.
The standard explanation for this premium is that small-cap stocks are inherently riskier.
The research shows (it is also described in a recent Scientific American article) that with every doubling of city population, each inhabitant is, on average, 15 percent wealthier, 15 percent more productive, 15 percent more innovative, 15 percent more likely to contract infectious disease and 15 percent more likely to be victimized by violent crime regardless of the time period and regardless of location or the particularities of any given city.
The data also demonstrates that cities’ use of resources follows a similar, though inverted, law. When the size of a city doubles, its material infrastructure — anything from the number of gas stations to the total length of its pipes, roads or electrical wires — does not. A city of ten million typically needs 15 percent less of the same infrastructure than do two cities of five million each. On average, the bigger the city, the more efficient its use of infrastructure, leading to important savings in materials, energy and emissions. Again, these patterns of increased productivity and decreased costs (economies of scale) hold true across nations with very different levels of development, technology and wealth.
Subsequently extended the scope of his research some more and discovered that companies scale too. At first glance, cities and companies seem quite similar. They are large combinations of people interacting in a well-defined physical space utilizing infrastructure and human capital. However, cities almost never die, while companies fail all the time. The modern corporation has an average lifespan of something like 40-50 years.
West examined growth curves for thousands of companies across a variety of variables including valuation, assets, revenue, profits and employees as a function of time. Almost across the board, the generic behavior is a sub-linear, much more like biology than cities. Using data from all companies publicly traded in the U.S., West saw that sales increased linearly with company size (one-to-one). However, profits and most other measures increased sub-linearly by an exponent of about one-eighth, with fluctuations proportional to the size of the company. Thus profits decrease relative to sales, for example. Indeed, as companies increase in size from 100 to 1,000,000 employees, their net income, assets and 23 other metrics per person increase only at a 4/5 ratio.
Accordingly, by most measures, we should expect companies to grow quickly for a while before slowing and then eventually declining and finally failing. Like animals and cities they can grow more efficient with size, but unlike cities, their innovation cannot keep pace as their systems gradually decay, requiring ever more costly repair until a crisis of some sort sinks them. Like animals, companies are sub-linear and doomed to die.
Companies are the infrastructure of economies. Accordingly, they scale sub-linearly. The danger, West says, is that the inevitable decline in profit per employee makes large companies increasingly fragile and thus vulnerable to any number of potential disruptions, including market volatility. As they become more and more complex they thus become more and more unstable. Since huge companies have to support multiple business lines and risks together with a huge infrastructure — overhead costs increase with size — even a minor disturbance can lead to significant or even catastrophic losses.
So perhaps the small-cap premium isn’t (or isn’t just) a function of risk. The inherent inefficiencies of large companies — inefficiencies that grow as companies grow (which may also help to explain why mergers so often fail) – are a drag on productivity and profits. As West puts it, “Companies are killed by their need to keep on getting bigger.”
Fuente: http://rpseawright.wordpress.com/2013/0 ... p-premium/