Sectoral Analysis of Small and Large Firms and its Implications for Size Premium in Indian Stock Market

Different sectors of an industrial economy tend to have peculiar features and their growth, profitability and performance vary overtime. Therefore, it can be argued that small firms concentrate in certain inherently weak, less profitable and more risky sectors of the economy as against highly profitable, healthy and less risky sectors to which large firms should belong. If it is so then a part of the size effect may be explained by sector premium rather than by firm specific factors such as liquidity, operating and financial characteristics and so on. This paper investigates into this possibility. The results show that small firms are concentrated in certain poor performing sectors (Chemicals, Capital goods, Textile, Consumer durables) while most of the large firms belong to healthy, stable and highly profitable sectors (IT, FMCG, Banking). However sectoral premium (i.e. the return differential between bad performing and good performing sectors) accounts for only a small part of the documented size premium. It implies that although small firms sectors tend to be less profitable, it is not the sector specific effect but firm specific effect which accounts for large size premium in Indian stock market