The persistence of the small firm/January effect: Is it consistent with investors' learning and arbitrage efforts?

Authors

Kathryn E. Easterday, Miami University
Pradyot K. Sen, University of Cincinnati
Jens A. Stephan, Eastern Michigan UniversityFollow

Document Type

Article

Publication Date

2009

Department

Accounting and Finance

Abstract

Monte Carlo simulation is a powerful spreadsheet-based tool that allows managers to better understand and visualize risk and uncertainty in discounted cash flow (DCF) analysis. The primary output, a histogram of net present values (NPV), maps the entire distribution of possible outcomes as a bell-shaped curve and therefore estimates the probability of success for the project (e.g., NPV > zero). Although we use fictional names, we illustrate a real capital budgeting problem using Monte Carlo simulation to demonstrate how employing this tool can result in more-informed decision making.

DOI

10.1016/j.qref.2008.07.001

Citation

Easterday, K. E., Sen, P. K., & Stephan, J. A. (2009). The persistence of the small firm/January effect: Is it consistent with investors' learning and arbitrage efforts? Quarterly Review of Economics and Finance, 49(3), 1172–1193. doi:10.1016/j.qref.2008.07.001