The Effect of Size on Stock Returns in an Emerging Financial Exchange

Abstract

This study examines the effect of firm size on excess stock returns with time variant factor of January and July. Broadly speaking, the extant literature finds negative relationship of firm size with stock returns. Smaller firms enjoy higher risk adjusted returns. This study investigates all the firms listed on the Pakistan Stock Exchange (PSX). Monthly data is used from January 2007 to November 2018; firm-level monthly closing stock price, KSE-100 index values, market capitalization are main variables of this study. Pooled Ordinary Least Squares (POLS) and firm Fixed-Effects (FE) regression techniques are applied, and results suggest that size of the firm is negatively and significantly related to the stock returns, i.e., our analysis confirms the presence of a size effect within the Pakistani equity market. The evidence suggests that investors demand higher premium while investing in small capitalized stocks. Moreover, little research has been conducted to investigate the presence of firm size effect on stock return in capital market of Pakistan. Besides, the market structure and regulatory environment of PSX is quite different from many emerging markets of the world, such as sophistication level of retail investors and presence of narrow price limits; hence that demands further investigation. Lastly, our approach is more robust as we have taken more than 340 firm-level excess stock returns data to check the size premium on monthly-basis.

Keywords: Firm Size, Stock Returns, Karachi Stock Exchange, Market Capitalization, Month-Effect

JEL Classification: G11, G12