Evidence of Size Effect on Stock Returns in India

Abstract

This paper reports the results of a study designed to examine if any firm-specific characteristics explain the cross-sectional variation in stock returns using Fama and Macbeth's methodology. It was found that size (measured by market capitalization), market leverage, price-to-book value, and earnings-to-price ratio were highly correlated with stock returns. While size and price-to-book-value were negatively correlated with stock returns, earningsto- price ratio and market leverage were found to be positively correlated with stock returns. The study also found a flat relationship between returns and beta. However, variables other than size did not have any incremental explanatory power, once the size effect had been adjusted for. On splitting the sample period into pre-95 and post-95 sub-periods, it was found that the above effects were predominant in the post-95 sub-period compared to the pre-1995 one. In the entire sample period, small firms generated an annualized excess return of 70 per cent over the large firms.

The Effect Of Financial Leverages And Market Size On Stock Returns

“…Since there is a negative impact between market size and stock returns, by 1% decrease in market size will increase the stock returns by 3.37%. The null hypothesis, H0 was rejected this negative significant impact between the market size and stock returns is aligned with past researcher, Mohanty (2002).…”

“…According to Mohanty (2002) who studied on firm-specific characteristics using Fama and Macbeth's approach, size of company and price to book value resulted to have an inverse relationship with https://doi. org/10.15405/epsbs.2020.12.05.56 Corresponding Author: Sahaida Laily Md Hashim Selection and peer-review under responsibility of the Organizing Committee of the conference eISSN: 2357-1330 526 stock return, whereas the other variables, leverage and price-earnings ratio found to have a direct relationship with stock returns.…”

The Effect of Illiquidity on Stock Return on the Indonesia Stock Exchange

“…These results are not in accordance with the formulated hypothesis that size has a negative effect on stock returns. Mohanty (2002), in her research, found that size is positively related to stock return. She did not deny the opinion of Fama and French in their research in 1993, 1995, and 1996 that size is a proxy for several risk factors and premium size is the price of that risk.…”

Company Attributes and Cross Section of Stock Returns in India

“…Mohanty (2002) found size, market leverage, EIP ratio and price to BV ratio were related to returns and the size effect was most prominent. Connor & Sehgal (2001) studied the Fama and French three-factor model from 1989-1999.…”