Size Effect in Indian Stock Market

The book is an outcome of the extensive research work on size effect (common stocks of small firms provide higher average risk adjusted returns than those of large firms), which is by far the most strongly documented CAPM anomaly. The primary objectives of the study are to test for size effect in Indian stock market over the period 1990-2003 and to identify the causes for its presence (or absence). The study, Inter Alia attempts to develop an empirical model for capturing size effect in India. A strong size effect has been found to exist during the entire study period irrespective of the fact whether we use market based (market capitalisation) or non-market based size measures (net sale, net fixed asset, total assets, net working capital). However the empirical evidence rules out the possibility of any seasonality or cyclicity in capturing size effect in Indian stock market. This is contrary to the empirical evidence provided for U.S. and other mature markets. The empirical model with five firm specific variables viz-book to market ratio, institutional neglect, average daily trading volume, debt-equity ratio and operating profit ratio has been found to capture a large part of the size effect. Although small firms tend to concentrate in certain poor performing sectors, size effect can not be attributed to any sector premium. The results of the study are of special interest to academicians, researchers as well as practitioners. It provides an out of sample test for the size effect as documented in US and other markets. These results can be used by investment analysts, mutual fund managers as well as marginal investors in devising size based investment strategies which promise extra-normal returns in Indian stock market.