Small minus Big again

Regarding my previous post, why is the SMB factor in Brazil negative? Apart from liquidity problems, one possible explanation could rely on investor behavior. There is a preference for big stocks in our market. But why? If one associates this with economic and political uncertainty and information asymmetry still prevailing in our economy and capital markets, there could be an explanation based on rational expectations. Since uncertainty negatively affects the informational efficiency of firms’ stock prices with smaller capitalization, agents become less likely to use such prices as a signal of investment opportunities (Drobetz et al., 2018). On the other hand, investing in smaller firms is considered riskier, and uncertainty about social, political, and economic conditions influence investor sentiment toward risk (Debata & Mahakud, 2018). In this sense, in periods of greater uncertainty, agents tend to shift the composition of their portfolios toward assets that pose less risk. Therefore, financial stress caused by uncertainty can intensify flight-to-safety (capital shifts to less risky investments) and flight-to-quality (reduced relative demand for risky assets) effects (Dash et al., 2019).