Mood Swings and the Firm Size Premium

Evidence accumulated in the literature indicates that the size effect is related to corporate and macroeconomic variables and is paid to compensate for bearing risk. We show that the size premium is also driven by daily variations in investors’ moods. We focus on two conditions often cited as possible mechanisms that drive variations in mood: Monday and seasonal affective disorder. The findings are consistent with the evidence that mood deteriorates on Mondays and in the fall and are consistent with the claim that the size effect manifests during economic expansion but weakens in the contraction phase of the economic cycle.

JEL classification: G10, G12, G14.