The Cross-Section of Expected Returns on Penny Stocks: Are Low-Hanging Fruits Not-So Sweet?

20 Pages Posted: 26 Sep 2016 Last revised: 4 Oct 2016

See all articles by Ananjan Bhattacharyya

Ananjan Bhattacharyya

Metallurgical and Materials Engineering, IIT Kharagpur

Abhijeet Chandra

Vinod Gupta School of Management, IIT Kharagpur

Date Written: September 20, 2016

Abstract

In this paper, we study the determinants of expected returns on the listed penny stocks from two perspectives. Traditionally financial economics literature has been devoted to study the macro and micro determinants of expected returns on stocks (Subrahmanyam, 2010). Very few research has been carried out on penny stocks (Liu, Rhee, & Zhang, 2011; Nofsinger & Verma, 2014). Our study is an effort to contribute more empirical evidence on penny stocks in the emerging market context. We see the return dynamics of penny stocks from corporate governance perspective. Issues such as shareholding patters are considered to be of much significance when it comes to understand the price movements. Using cross-sectional data on 167 penny stocks listed in the National Stock Exchange of India, we show that (i) Returns of portfolio of lower market-cap penny stocks are significantly different(higher) than that of higher market-cap penny stocks. (ii) Returns of portfolio lower P/E stocks are significantly different (higher) than that of higher P/E stocks. Similarly, returns of portfolio of higher P/B stocks are significantly different (higher) than that of lower P/B stocks, and returns of portfolio of lower priced penny stocks are significantly different (higher) than that of higher priced penny stocks. (iii) Trading volume differences due to alphabetism are insignificant. (iv) Differences in returns of portfolios based on beta and shareholding patterns are insignificant.

Keywords: Penny stocks, Asset pricing, Returns, Emerging markets, Corporate governance

JEL Classification: G11, G14, G18

Suggested Citation

Bhattacharyya, Ananjan and Chandra, Abhijeet, The Cross-Section of Expected Returns on Penny Stocks: Are Low-Hanging Fruits Not-So Sweet? (September 20, 2016). Available at SSRN: https://ssrn.com/abstract=2386949 or http://dx.doi.org/10.2139/ssrn.2386949

Ananjan Bhattacharyya

Metallurgical and Materials Engineering, IIT Kharagpur ( email )

Kharagpur
IIT Khragpur
Kharagpur, IN West Bengal 721302
India

Abhijeet Chandra (Contact Author)

Vinod Gupta School of Management, IIT Kharagpur ( email )

Kharagpur, 721302
India

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