The size effect and default risk: Evidence from the Vietnamese stock market


  • Quy Duong Le
  • Bertrand Philippe


  • Default risk
  • Distance-to-default
  • Fama-French
  • Size premium

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The literature is inconclusive on the source of the size effect. Our paper contributes to extant studies by investigating the relationship between the size premium and default risk in Vietnam, an important frontier emerging market. The debt-to-equity ratio and distance-to-default of Merton (1974, The Journal of Finance, 29, 449) are used as distress-risk proxies. Based on more than 300 listed stocks over 2009–2019, we discover that the small portfolio delivers the highest average return. The excess return on the small portfolio is concentrated in firms with high distress risk. Furthermore, neutral size factors are built to dissect returns on the Fama-French size factor from the default-risk premium. Empirical results prove that the explanatory power of the size factor is negatively affected when the default-risk neutrality is applied. Given this backdrop, the size premium in Vietnam is likely to be compensation for distress risk, consistent with a risk-based point of view.

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