Size Effect in Indian Stock Market : Some Empirical Evidence

In this study we attempt to test if there is a size effect in Indian stock market. The data comprises of top 482 Indian companies for the period 1990-2003. We find a strong size premium using six alternative measures of company size viz. Market capitalization, Enterprise Value, Net Fixed Assets, Net Annual sales, Total Assets and Net Working Capital. Further the size based investment strategy seems to be economically feasible as it provides extra normal returns on risk adjusted basis. Frequent re balancing of size based portfoilo is however found to be undesirable. The size effect does not seem to be owing to any seasonality or business cycle factors. The study has strong implications for mutual funds managers, investment analysts as well as small investors who are continuously on lookout for trading strategies that beat the market. The presence of a strong size premium also raises doubts about the informational efficiency of Indian equity market