What is the size premium (SP), and when is it relevant?

the empirical observation that smaller firms have historically earned higher returns than CAPM predicts.

Three plausible drivers — smaller firms are less liquid, have greater information asymmetry (less analyst coverage), and carry concentration risk in their business models.

Ibbotson / Duff & Phelps — typically 1–4% on top of the CAPM CoE, depending on market cap.

For middle-market targets under $500m EV, often add +1–2%. Formula: CoE = Rf + β × ERP + SP. Academically contested (Fama-French), but the practical IB standard.