Size, Leverage and Stocks Returns : Evidence from Pakistan

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