Size, size potential, and expected stock returns In memory of Simon Benninga

The financial literature shows that, on average, larger firms earn lower returns. This study examines the relationship between market capitalization and stock returns, as well as the size growth potential of firms according to their economies of scale (size and size potential are not correlated). According to generally accepted beliefs, larger firms do earn lower returns on average. This study adds to the literature by finding that firms' size potential (according to their economies of scale) is also negatively related to firms' average returns. This new information is significant-both statistically and economically.