Is the Size Premium Really Driven by Firm Size?

Not really. Decomposing firm size (i.e., market equity) into horizon-based components, we find that size five years ago explains 80% of the current size but has little predictive power for future returns. In contrast, the change in size over the prior two to five years explains only 18% of the size but completely captures the size premium. The decomposition relates the size premium to other known asset pricing phenomena and offers new insights into the disappearance of the size premium and the behavior of new entrants