The Small-cap-alpha Myth

Many say the market for the shares of smaller companies—so called small-cap and mid-cap stocks—offers greater opportunity for active management to add value than does the large-cap market. The underlying notion is that the market for small and medium caps is less efficient than the large-cap market, and, therefore, security mispricing is more prevalent there. It is true that fewer securities analysts follow smalland mid-cap companies, and they are less widely held by portfolio managers. But is there evidence that active management is really more productive in the smalland mid-cap arena than in the large-cap arena?