The Small Cap Advantage?

I found a very interesting essay by Robert Arnott. In the 2005 Sept./Oct. issue of the Financial Analysts Journal, Arnott noted that a single large cap could describe two companies: one with a large book value and a commensurate price; the other a small company, as measured by equity, with a healthy valuation. Of course, the same potential for ambiguity existed within a small cap. As a result, a reliance upon price as an indicator of company size conflated the value of market opinion at the expense of real assets and earnings power.

So Arnott separated a group of small market cap stocks, from 1967-1987, by sales and by book value. He found that the smaller BV groups benefited much less from the "size effect" compared to the higher sales, lower market cap stocks.

Here is the essay in pdf format, http://www.rallc.com/ideas/pdf/disentaglingSizeValue.pdf.