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Explaining Size Effect for Indian Stock Market

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Abstract

Using data for BSE 500 companies from October 2003 to January 2015, we confirm the presence of strong size effect in Indian stock market. Controlling for penny stocks, we find that returns decrease almost monotonically with firm size. The findings are robust for alternative size measures, i.e. market capitalization, total assets, net fixed assets, net working capital, net sales and enterprise value. We find the presence of non-synchronous trading bias and reverse seasonality effect. It is observed that market, size, value and business cycle factors explain size effect while liquidity and momentum factors have little role in this process. Thus, rational sources explain the size anomaly in the Indian context.

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Notes

  1. CNXS&P 500 comprises only of a subset of stocks listed on NSE. It may be noted that NSE has bout 1700 listed stocks. The excluded stocks may be exhibiting a wide range of betas including less than unit betas as well as some negative betas. However, their analysis is not within the purview of this research.

  2. All regressions including the CAPM operationalization employed in the study are estimated using the Newey–West procedure. This procedure automatically corrects for any autocorrelation and heteroscedasticity in our data.

  3. In pairwise correlations Liquidity factor has a correlation of 0.37 and 0.32 with Size and value factor respectively.

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Authors and Affiliations

  1. Fortune Institute of International Business, Delhi, India

    Asheesh Pandey

  2. Department of Financial Studies, University of Delhi, South Campus, Delhi, India

    Sanjay Sehgal

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  1. Asheesh Pandey
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  2. Sanjay Sehgal
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Correspondence to Asheesh Pandey.

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Pandey, A., Sehgal, S. Explaining Size Effect for Indian Stock Market. Asia-Pac Financ Markets 23, 45–68 (2016). https://doi.org/10.1007/s10690-015-9208-0

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  • DOI: https://doi.org/10.1007/s10690-015-9208-0

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