Comp.fundamental and Equity Returns Indian Markets

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Electronic copy available at: http://ssrn.com/abstract=1247717

1

Submission Cover

21

st

Australasian Finance and Banking Conference

1. Title

Company Fundamentals and Equity Returns in India

2. Primary Author

Dr. Vanita Tripathi

3. Co-Authors

(separate with comma)

4. Prizes

Select the prizes for which you would like to be considered (you may pick morethan one).(For more information about prizes please see the conference web site:www.banking.unsw.edu.au/afbc)

Prize Yes/No

Barclay's Global Investors Australia Prize Yes

BankScope Prize

NoSirca Research Prize NoAustralian Securities Exchange Prize No

5. Journals

Select the journals for which you would like to be considered (you may pick morethan one).

Journal Yes/No

Journal of Banking and Finance YesJournal of Financial Stability No

6. Conference Proceedings

Yes/No

Would you like your paper (if accepted) to be published by World Scientific Publishing CoLtd as a review volume compiling selected papers?

Yes

Electronic copy available at: http://ssrn.com/abstract=1247717

2

Company Fundamentals and Equity Returns in India

Author:Dr. Vanita Tripathi

Senior LecturerDepartment of commerceDelhi School of EconomicsUniversity of DelhiDelhi-110007

Telephone:

91-011-27667891

9213269951Email: vtripathi@commerce.du.ac.inDate of submission: May 13,2008

JEL Classification Number: G12, G14

Keywords: Size Effect, Value effect, P/E effect, Leverage effect, CAPM, Assetpricing.

Acknowledgements:The author is thankful to Indian Council of Social Science Research (ICSSR) New Delhi for providing financial support to carry out this study

Abstract

This paper examines the relationship between four company fundamental variables (viz.market capitalization, book equity to market equity ratio, price earnings ratio and debtequity ratio) and equity returns in Indian stock market using monthly price data of a

Electronic copy available at: http://ssrn.com/abstract=1247717

3sample of 455 companies forming part of S&P CNX 500 Index over the period June 1997to June 2007. We also investigate whether the inclusion of any one or more of thesefundamental variables can better explain cross sectional variations in equity returns inIndia than the single factor CAPM. We find that market capitalization and price earningsratio have statistically significant negative relationship with equity returns while book equity to market equity ratio and debt equity ratio have statistically significant positiverelationship with equity returns in India. The investment strategies based on thesevariables produced extra risk adjusted returns over the study period. Using Davis Famaand French(2000) methodology we find that Fama-French three factor model ( based onmarket risk premium, size premium and value premium) explains cross sectionalvariations in equity returns in India in a much better way than the single factor CAPM.These results have important implications for market efficiency, asset pricing and marketmicrostructure issues in Indian stock market.

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