TITLE : Size and return a study on Indian stock market

COMPANY NAME : sharewealth

Introduction
The Size effect is one of the prominent anomalies which have been observed in the stock markets
around the world. The present study attempts to find out if the portfolio of small stocks yields higher
returns vis-a-vis the portfolio of large stocks and whether the size effect is present in the Indian stock
market or not. The sample consists of the monthly returns of the stocks included in the S&P CNX 500
index. Equal weighted portfolios of thirty smallest and largest stocks were constructed for each year for
the entire period of the study based on the criteria of total assets and market capitalization. Using
correlation analysis, CNX Nifty Junior was finalized as the market proxy, and the market model was
applied by using the variables of excess returns on the portfolio of the stocks and the returns on the
market proxy. The results indicate that the returns on the portfolio of small stocks are not significantly
different from the returns on the portfolio of large stocks. Therefore, based on the results, the study
concludes that the size effect is not present in the Indian stock market.

Objectives
Primary

To identify the impact of share premium in return of a portfolio

Examines the size effect by comparing returns of the portfolios which have been
constituted based on the criteria total assets and total market capitalization

Secondary

Make an awareness about Indian stock market

To know which all are the factors will affect the return

Company profile

Sharewealth is promoted by a group of Financial Market Professionals having more than

20 years of experience in Financial Markets. Sharewealth Securities Ltd is the first
corporate member of National Stock Exchange of India Ltd, Bombay Stock Exchange
Ltd and MCX Stock Exchange Ltd(MCX-SX) from THRISSUR, the Cultural Capital of
Kerala. Sharewealth is also a Depository Participant with CDSL (Central Depository
Services (India) Ltd).
Sharewealth Securities Ltd has two group companies, Sharewealth Commodities Pvt Ltd
(Member: MCX, NCDEX, NMCE ,ICEX & NSEL) and Sharewealth Financial Services
Ltd (AMFI Registered Mutual Fund Distributor). Sharewealth has a group (Overseas
Joint Venture) company at Abu Dhabi, Sharewealth Financial Consultancy LLC.
Registered & Corporate offices of Sharewealth Group of companies are at Thrissur.

Mission
To educate growing investing public in a simple & practical way to help them to protect
their hard earned money and to make more money from financial & commodity markets"

Literature review
There are many studies in corporate finance literature who have observed the relationship
between stock return and various financial ratios, but there are very few studies who have
observed this relationship in Indian context
on Indian markets finding the relationship between stock returns and various performance
variables. According to the Banz(1981), small size firms have higher average stock returns, but
in case of average size and large size firms this size effect is not consistent. He also mentioned
that size effect exists but it is not clear why this effect exist, he was not clear with the fact that,
size is a factor or it is just a proxy for one or more true but unknown factors correlated with
sizeIn Guler Aras and Mustafa Kemal Yilmaz(2008) they examined the predictability of stock
return taking into consideration 12 emerging markets around the world. They have used, priceearnings ratio, dividend yield and market-to-book ratio as predictable variables and covered the

period of 1997 to 2003. This study finds variation in their findings, Market to book ratio shows
significant result in predicting stock return for one year period for most of the emerging
countries, But overall investor can forecast the potential stock market return for one year period
up-to certain extent by using Market to book ratio, partially dividend yield ratio and price
earnings ratio. According to the authors investor can improve their predictability by adding other
variables like, consumer price index which shows the macroeconomic changes in predicting
stock return in the market.
Robert H. Litzenberger and Krishna Ramaswamy(1982) studied the relationship between
dividend yield and stock return. According to this study,their results show that, there is positive
but non-linear relationship between dividend yield and stock return. But study also says that
significant dividend yield effects cannot pinned to information content in the prior knowledge
that firm will declare dividend of unknown magnitude.
Keith S. K. Lam(2002) studied the relationship between stock return and Size (ME), Leverage,
book to market equity ratio and earning price ratio in Hong Kong stock market, in this study he
has used Fama and French (FF) approach. Result from this study shows that, three accounting
variables book to market, E/P, ratio and size really captured the cross sectional variation in
average returns over the period. Other variables like book and market leverage also captured the
cross sectional variation but effects of those variables are dominated by Size, book to market
equity and E/P ratio, Hence those cannot be considered.
Pradosh Simlai(2009), In this paper Author has examined and reinvestigated the performance of
common stock return with two popular variables Size and book to Market Ratio. According to
their findings incorporation of time varying conditional variance can significantly supports the
impact of the three risk factors, he also concluded that, because of this findings Fama and French
model is successful and unaffected by the incorporation of time varying investment opportunity
set. His study also finds positive and significant relationship between size and Stock return.
In the study of Jeffrey Pontiff and Lawrence D. Schall(1995) they have examined the predictive
ability of the book to market ratio in Dow Jones industrial average. According to their findings,

Dow Jones Industrial average book to market ratio is good predictor of market return than
the other variables like dividend yield, and interest rates. Author also mention that, their findings
are sample specific where predictive power of book to market ratio occurs only before 1960. As
after 1960 there is no significant relationship.
Ian McManus, Owain AP Gwilym and Stephen thomas(2004) they observed the relationship
between stock return and dividend yield in UK stock market, they have introduced the data
related to earning to the asset pricing model in the form of payout ratio. In this study they have
introduced payout ratio and examines the relationship between payout ratio, dividend yield and
stock return. According to the result of this study, payout ratio does have impact on dividend
yield itself in explaining stock return.
Gabriel Perez-Quiros and Allan Timmermann (2000) have observed difference ofvariation in
stock return in different economic conditions and tried to examine stock returns of both small
firms and large firms. In that study they have considered three factors firm size, economic and
market condition for analyzing and capturing sensitivity of expected risk and returns. According
to the findings of this paper, Interest rate is the vital factor for sensitivity of stock return
volatility, expected returns of the firm is also very sensitive to this interest factor. In the recession
phase stock return of small firms are mostly affected, large firms stock returns also get affected
in such situation but compared to small firms it is less sensitive.
Kee Hong Bae, Jeong-Bon Kim(1998) in their study, they have taken the sample data of
Japanese firms. The main aim of their study was to examine the usefulness of the two
fundamentals, accrual earnings and book value of equity share for the purpose of predicting
stock returns. According to the result of this study, both accrual earnings and book value of
equity can predict the stock return and investors and policy makers can build profitable strategies
by using this approach. Paper also mentioned that, book value captures some aspects of equity
value of stock which are not captured by earnings.
Raj AggarwalTakatoHiraki and Ramesh P Rao(1992) examined the price to book ratio effect in
Japanese market. In this study they have observed that stocks with high price to book value ratio

have earn low returns whereas stocks with low price to book ratio have high low stock returns.
This study has observed inverse relationship between stock return and price to book ratio in
Japanese market. The result of this study also shows that, accounting data is useful for deciding
trading strategies in Japanese stock market because investors can actually predict the stock return
by calculating price to book ratio.

Research methodology
Descriptive research
Sample size 60 companies included in s&p CNX 100 index