``The ®rst shall be last''. Size and value strategy premia at the London Stock Exchange

The paper analyses the determinants of cross-sectional stock returns at the London Stock Exchange in the last 26 years. It ®nds that portfolio strategies based on low values of earning per share (EPS), market to book value (MTBV), market value (MV) and return on equity (ROE) signi®cantly outperform the index. Do size and value (S&V) strategy premia disappear when risk-adjusted or do they reveal gains from trading against noise, near rational, liquidity or ``weak-hearted'' traders? We ®nd that the signi®cance of cross-sectional determinants of these strategies is not absorbed by ex post betas. They are not riskier in terms of monthly return standard deviations, covariation with GDP growth and their premia do not disappear when survivorship bias is taken into account. Portfolio mean monthly returns (MMRs), regressed on several risk factors in 3-CAPM models, con®rm that S&V strategy premia persist when risk adjusted. Empirical results also mark the di€erence between ROE and MTBV portfolios, on the one side, and MV and EPS portfolios, on the other. Descriptive statistics on preformation and postformation returns, average balance sheet values and preformation standard deviations clearly show that ROE and MTBV portfolios have a common ®nancial distress factor and are then more exposed to systematic risk. Ó 2000 Elsevier Science B.V. All rights reserved. JEL classi®cation: G11