Size, Leverage and Stocks Returns: Evidence from Pakistan

International Journal of Academic Research, Vol. 4 (1), January 2012

9 Pages Posted: 8 Apr 2014

See all articles by Faisal Khan

Faisal Khan

University of Peshawar

Shahid Ali

Institute of Management Sciences - Peshawar

Arshad Hassan

Capital University of Science and Technology Islamabad

Date Written: January 1, 2012

Abstract

The theme of this study is to examine the effect of size on the basis of market capitalization and leverage with high and low debt-to-equity ratios on identified portfolios required rate of returns listed at Karachi Stock Exchange (KSE). Multivariate regression has been used to identify the relationship among market premium, size premium, debt-to-equity premium and portfolio returns. The sample has been selected from 21 sectors consisting 200 listed-Pakistani firms for the period of January 2001 to December 2007. The p-value at 95% confidence level shows the relationship with CAPM and the size premium is positive and significant related to portfolio returns (P1 to P5), while the leverage premium (DER premium) is positively insignificant. It has been observed that the firms with high market capitalization outperform the firms with low market capitalization. The proposed multi-factor model increased the explanatory power of size premium by almost 40% at P1; the value of R2 indicated that the contribution of size premium was high as compared to the leverage premium. Therefore the security analysts, institutional investors, fund managers and other stakeholders should consider the size premium (SMB) as an important factor for determinant of required rate of returns.

Keywords: Market premium; Size premium; leverage premium

Suggested Citation

Khan, Faisal and Ali, Shahid and Hassan, Arshad, Size, Leverage and Stocks Returns: Evidence from Pakistan (January 1, 2012). International Journal of Academic Research, Vol. 4 (1), January 2012, Available at SSRN: https://ssrn.com/abstract=2419826

Faisal Khan (Contact Author)

University of Peshawar ( email )

Quaid-E-Azam College of Commerce
Peshawar, PA Khyber Pukhtoon Khwa 25125
Pakistan

Shahid Ali

Institute of Management Sciences - Peshawar ( email )

Sector E-5, Hayatabad, Phase VII
Hayatabad
Peshawar, KPK 25000
Pakistan

Arshad Hassan

Capital University of Science and Technology Islamabad ( email )

Pakistan

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