A valuation study of stock-market seasonality and firm size

Abstract

Existing studies on market seasonality and the size effect are largely based on realized returns. This paper investigates seasonal variations and size-related differences in cross-stock valuation distribution. We use three stock valuation measures, two derived from structural models and one from book/market ratio. With each measure, we find that the average valuation level is the highest in mid summer and the lowest in mid December. Furthermore, the valuation dispersion (or, kurtosis) across stocks increases towards the yearend and reverses direction after the turn of the year, suggesting increased movements in both the under- and overvaluation directions. Among size groups, small-cap stocks exhibit the sharpest decline in valuation from June to December and the highest rise from December to January. For most months, small-cap stocks have the lowest valuation among all size groups. In a typical month, small-cap stocks show the widest cross-stock valuation dispersion, meaning they are also the hardest to value. Overall, large stocks enjoy the highest level of valuation uniformity and are the least subject to seasonal valuation variations.