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Size effect and value effect have been considered as two importantfactors affecting stock returns over the last few decades in a way that stocks of smaller firms have higher returns than those of larger firms and that the stocks of firms with high book to market ratio out perform in return compared to stocks of firms with low book to market ratio. This study investigates the effect of financial distress risk on size effect and value effect. To do so, the sample included 128 firms during the period of 2004 to 2011. In order to investigate the research hypotheses Fama and French`s (1993) three-factor model has been applied. The findings of the study show that in the surveyed period, there is the under reaction to financial distress risk and also to embedded risk associated with small and value stocks in Iran. There is, however, no relationship between under­reaction to financial distress risk and size and value effects and under relation to financial distress risk.