The relation between returns, ownership structure, and market value

Numerous empirical studies have documented the small firm effect of higher risk‐adjusted returns for small firms in contrast to large firms. The explanation for such a phenomenon remains incomplete. This research examines the relationship among ownership structure, size, and returns under the hypothesis that firms with diffuse ownership (manager controlled) have higher returns to compensate for the risk inherent in the agency relationship. This research adds a dimension to the explanation of the small firm effect, which is well‐founded in economic theory but has not been tested. The results indicate no significant relationship between ownership and return.