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A RESEARCH REPORT
ON
Submitted By
SANTHOSH KUMAR.S
(REGD.NO:04XQCM 6078)
Under the Guidance and Supervision
Of
PROF. B.V.RUDRA MURTHY
Declaration
I hereby declare that this report titled “Sources of size effect-Evidence from the
Indian stock market” is a record of independent work carried out by me, towards the
partial fulfillment of requirements for MBA course of Bangalore University at M.P.Birla
Institute of Management. This has not been submitted in part or full towards any other
degree.
PLACE: BANGALORE
Principal’s Certificate
This to certify that this report titled “Sources of size effect-Evidence from the
Date: (Dr.N.S.Malavalli)
GUIDE’S CERTIFICATE
This is to certify that the Research Report entitled “Sources of size effect-Evidence
ACKNOWLEDGEMENT
Finally, I express my sincere gratitude to all my friends and well wishers who helped
me to do this project.
SANTHOSH KUMAR.S
TABLE OF CONTENTS
CHAPTERS PARTICULARS
1. INTRODUCTION
CAPM model
2. REVIEW OF LITERATURE
3. RESEARCH METHODOLOGY
Statistical procedures
5. CONCLUSION
Glossary ,Bibliography
INTRODUCTION:
Size effect implies that small firm stocks tend to outperform large firm stocks over a long
period of time. it has been found to be universal phenomenon. Studies have also shown the
presence of strong size effect in the Indian stock market.
There are different explanations of the documented size effect. One view point is that small
firms are inherently riskier than large firms owing to differences in their operating, financial
and liquidity risk characteristics .It has been empirically shown that small firms stocks are less
liquid and more neglected by institutional investors and security analysts. the studies have
shown that Small firms are exposed to higher operating and financial risks .They have lost
market values because of poor performance .they are inefficient producers, and are likely to
have high financial leverage and cash flow problems. Small firms tend to have poor customer
base, outdated technology, less diversified product lines and relatively lower access to financial
market.
The prices of the small firms stocks tend to be more sensitive to changes in the economy as
they are less likely to survive adverse economic conditions .however if the small firms are run
efficiently they may do well and even prosper in a economy which is growing slowly .but less
efficient firm may not survive at low growth rate in the long run.
If size as anomaly to the standard CAPM might have arisen due to the reason that beta is not
capturing the full systematic risk of small firms this implies beta is not a comprehensive risk
measure. If we believe that CAPM is a rational benchmark .then size effect is owing to
irrational investor behavior.
CAPM
Capital asset pricing model referred to as CAPM, is a centerpiece of modern financial
economics. The model gives us a precise prediction of the relationship that we should observe
between the risk of an asset and its expected return.
According to CAPM
1. The risk of the project is measured by beta of the cash flow with respect to the
return on the market portfolio of all assets in the economy.
2. The relation between the required expected return and the beta are linear
CAPM decomposes a portfolio's risk into systematic and specific risk. Systematic risk is the
risk of holding the market portfolio. As the market moves, each individual asset is more or less
affected. To the extent that any asset participates in such general market moves, that asset
entails systematic risk. Specific risk is the risk which is unique to an individual asset. It
represents the component of an asset's return which is uncorrelated with general market moves.
According to CAPM, the marketplace compensates investors for taking systematic risk but not
for taking specific risk. This is because specific risk can be diversified away. When an investor
holds the market portfolio, each individual asset in that portfolio entails specific risk, but
through diversification, the investor's net exposure is just the systematic risk of the market
portfolio.
Formula is the essential conclusion of CAPM. It states that a stocks (or portfolio's) excess
expected return depends on its beta and not its volatility. Stated another way, excess return
depends upon systematic risk and not on total risk.
We call CAPM a "capital asset pricing model" because, given a beta and an expected return for
an asset, investors will bid its current price up or down, and adjusting that expected return so
that it satisfies formula.
Accordingly, the CAPM predicts the equilibrium price of an asset. This works because the
model assumes that all investors agree on the beta and expected return of any asset. In practice,
this assumption is unreasonable, so the CAPM is largely of theoretical value.
Liquidity refers to the ease with which an asset can be converted into cash that is sold some
evidence suggests that illiquidity can reduce market prices substantially.
A rigorous treatment of the value of the liquidity was first developed by Amihud and
Mendelson .liquidity plays an important role in explaining rates of return on financial assets
.investors prefer more liquid assets with lower transaction costs .relatively illiquid assets trade
at lower prices or equivalently expected return on illiquid assets must be higher .
CAPM is probably the most well known and utilized model of asset valuation, but do exist
several problems with it.
1. The CAPM is derived only under several very strict and unrealistic assumptions
2. The CAPM was originally derived as a static model of asset valuation. Hence,
the model did not account for the dynamic nature of financial markets with
respect to determination of rates of return.
3. The CAPM was originally developed to theoretically be a link between the
financial and real sectors of the economy.
Data:
Sample includes all common stocks quoted on the NYSE between 1926 and 1975, monthly
price and return data & no of shares outstanding at the end of each month. Three different
market indices are used CRSP-equally and value weighted indices, combination of value
weighted index & return data on corporate & government bonds.
Methodology:
Then they selected 25 portfolios first one to five on the basis of market value. Then securities
in each of those five are in assigned to one of five portfolios on the basis of their beta. Next
five years data are used for the re estimation of the security beta .stock prices and number of
shares outstanding at the end of five year periods is used for the calculation of the market
proportion. the cross-sectional regression is performed in each month.
Conclusions:
Evidence presented in this paper suggests that the CAPM is mis specified .small NYSE firms
have had significantly larger risk adjusted returns than large NYSE firms over a forty year
period. The size effect exists but it is not at all clear why it exists .so it should be interpreted
with caution. it might be tempting to use the size effect e g: as the basis for the theory of
mergers larger firms are able to pay a premium for the smaller stocks since they will be able to
discount the same cash flows at a smaller discount rate .naturally, this might turn out to be
complete nonsense if size were to be shown to be just a proxy.
Methodology
For each of the 4 sample years 3 sets of 10 equally weighted portfolios were constructed, on
the basis of market value, average daily trading volume, number of day’s the firm traded
during the year. Then mean return was calculated by combining portfolio return series for each
of the four years and then taking the arithmetic mean .then risk adjusted returns were
calculated by subtracting from the daily return series the OLS estimate of beta times the return
in market portfolio
Then F test was used whether the mean returns of the smallest firm size portfolios are equal to
the mean returns on largest size portfolios.
Conclusion
Paper addresses the question of whether the firm size effect is explicable in terms of
differences in trading activity between the large and small firms because of either a liquidity
premium associated with small firms or a mis assessment of the risk of small firms. no
evidence is found consistent with existence of a liquidity premium moreover ,differences in
trading activity do not appear to fully explain the existence of firm size effect through bias in
the estimation of beta.
Methodology
After ranking the portfolios according to the firm size CHAN used FAMA & MACBETH
(1973) method to test the firm size effect. Then they performed the cross sectional regression
of the 20 portfolios. Then 2 two types of tests are performed with the residuals.
1. Univariate analysis
2. Paired T test
To see if the estimated residuals from the two extreme firm size portfolios are statically
different.
Conclusions
They first explored the feasibility of a multi factor pricing equation as an explanation of the
firm size effect evidence suggests that firm size anomaly is essentially captured by a multi –
factor pricing model .the higher average returns of smaller firms are justified by the additional
risks borne in an efficient market.
Data
Study limits data of BSE 500 stocks and stocks are short listed to 273 on the basis of
continuously trading criteria from January 1991 to January 2002.
Methodology
In order to measure the returns monthly returns are used in the study then
Two value weighted portfolios are constructed on the basis of market value one portfolio
including 25 small stocks and other including 25 large stocks out of BSE 500 stocks.
Results
Results shows that the beta of the large firms are more or less equal to the market beta and
priced efficiently while smaller firms beta was less than one . it may be due to poor trading of
the small stocks whereby they are perceived to be less sensitive to the market movement. then
Jensen’s alpha is shows that on an average consistently outperform the market returns but
larger firms generate equal or less returns than market returns.
Conclusion
the descriptive statistics suggests that an average the mean, standard deviation, skewness of
small companies are higher than large firms and the result do not support the infrequent trading
is the main reason behind the small firm effect and differential growth rates between small
firms and large firms ,market index helps to unwind the small firm effect.
PROBLEM STATEMENT:
The causes of the size effect in the Indian stock market
OBJECTIVE:
To find whether size affects the operating, financial and liquidity charectestics of the firms
HYPOTHESIS:
Null Hypothesis H0=the operating, financial and liquidity characteristics does not substantially
Alternative Hypothesis H1= the operating, financial and liquidity characteristics substantially
differentiates small firms from the larger ones
DATA:
Secondary data
The study uses the following accounting, financial and market related information regarding
the sample companies i.e. number of shares outstanding ,daily trading volume, share holding
patterns, book value per share ,market price per share ,total long term debt, equity capital,
operating profits(EBIT) ,net sales, fixed interest charges, capital employed ,total assets ,current
assets and current liabilities.
Sources of data
All the necessary data for the study have been collected from PROWESS data base and
websites
Period of study
The study is conducted for a period of years starting from 2000 to 2004. Five years is taken, so
that the results presented are more accurate, where we can rely upon the results that are
calculated for the purpose of analysis. Also the analysis and conclusions will be more
accurate.
Sample
The sample for the purpose of the study consists of 60 companies forming part of CNX NIFTY
and CNX NIFTY JUNIOR over the period of 2000-2004.the sample has been selected because
a strong size effect has been found to exist on NSE using the same sample over the given
period.
METHODOLOGY:
In December 2000 all the sample companies are ranked on the basis of market capitalization
for both CNX NIFTY and NIFTY JUNIOR indices .and two equally weighted portfolios
namely large firms’ portfolio consisting of top 30 stocks from CNX NIFTY with largest
market capitalization and small firm’s portfolio consisting of top 30 stocks from NIFTY
JUNIOR with largest market capitalization. then various operating, financial and liquidity
characteristics of the firms comprising these portfolios have been measured as at the end of the
December 2000.then same securities consisting portfolios are constructed every year at the end
of December till one reaches 2004.then averages of all the measures for the 5 years taken into
account to derive the different charectestics of small and large portfolio stocks.
STATISTICAL PROCEDURE:
Initially ANOVA a parametric test has been used to test for the significant differences among
means of various measures of small firms and large firms stocks.
ANOVA-Enables us to test for the significance among more than two sample means. We will
be able to make inferences about whether our samples are drawn from populations having the
same mean or not.
BASIC CONCEPTS:
Analysis of variance is based on a comparison of two different estimates of the variance, ó2, of
our overall population; the three steps in analysis of variance are as follows
1. Determine one estimate of the population variance from the variance among the
sample means.
2. Determine second estimate of the population variance from the variance within
the sample means.
3. Compare these two estimates, if they are approximately equal in value, accept
the null hypothesis. And if the they are not in equal in value then accept the
alternative hypothesis.
Interpreting F RATIO
F statistic
F=between-column variance/within-column variance
The denominator and numerator should be about equal if the null hypothesis is true .the nearer
the F ratio comes to 1, then the more we inclined to accept the null hypothesis. Conversely, as
the F ratio becomes larger we will be more inclined to reject the null hypothesis and accept the
alternative hypothesis.
Exhibit-1
Tables showing firms charectestics of S&P CNX NIFTY and S&P CNX NIFTY JUNIOR
companies.
S & P CNX NIFTY
TABLE-1
Institutional
Firms characteristics Investors Share
Company Name AVERAGE AVERAGE AVERAGE
Bajaj Auto Ltd. 23.2175 19.138 0.648
Bharat Heavy Electricals Ltd. 29.675 11.654 0.644
Bharat Petroleum Corpn. Ltd. 29.0275 4.494 2.726
Cipla Ltd. 25.8575 22.802 0.874
Dr. Reddy'S Laboratories Ltd. 32.705 23.818 0.742
G A I L (India) Ltd. 15.895 20.2 0.78
H C L Technologies Ltd. 12.415 49.518 0.342
H D F C Bank Ltd. 32.885 70.978 0.08
Hero Honda Motors Ltd. 30.765 15.982 2.486
Hindalco Industries Ltd. 39.8025 35.996 0.402
Hindustan Lever Ltd. 26.555 19.522 1.472
Hindustan Petroleum Corpn. Ltd. 39.88 4.636 2.736
Housing Development Finance
Corpn Ltd. 63.8425 94.818 0.112
I C I C I Bank Ltd. 53.8925 77.14 0.076
I T C Ltd. 48.6225 38.95 0.682
Infosys Technologies Ltd. 47.3875 35.248 0.99
Larsen & Toubro Ltd. 49.69 11.8 0.72
Mahanagar Telephone Nigam
Ltd. 33.78 27.898 0.322
National Aluminium Co. Ltd. 8.1475 35.812 0.452
Oil & Natural Gas Corpn. Ltd. 4.4225 53.57 0.384
Ranbaxy Laboratories Ltd. 36.34 17.012 1
Reliance Energy Ltd. 38.1275 14.048 0.54
Reliance Industries Ltd. 30.7825 13.918 0.86
Satyam Computer Services Ltd. 59.5175 29.762 0.878
State Bank Of India 71.8125 69.81 0.096
Tata Motors Ltd. 35.1875 6.802 0.958
Tata Steel Ltd. 36.2125 15.682 0.65
Videsh Sanchar Nigam Ltd. 18.1775 32.794 0.698
Wipro Ltd. 4.4475 22.468 1.194
Zee Telefilms Ltd. 37.7575 53.896 0.106
TABLE-2
Interest
Firms characteristics coverage
Company Name AVERAGE AVERAGE AVERAGE
Bajaj Auto Ltd. 18.978 0.22 278.83
Bharat Heavy Electricals Ltd. 18.078 0.144 8.59
Bharat Petroleum Corpn. Ltd. 30.29 0.774 10.31
Cipla Ltd. 31.56 0.072 65.582
Dr. Reddy'S Laboratories Ltd. 26.222 0.274 41.592
G A I L (India) Ltd. 25.756 0.41 11.504
H C L Technologies Ltd. 18.662 0.008 113.058
H D F C Bank Ltd. 49.134 1.356 1.484
Hero Honda Motors Ltd. 78.288 0.142 23.928
Hindalco Industries Ltd. 17.844 0.256 13.812
Hindustan Lever Ltd. 62.096 0.318 129.536
Hindustan Petroleum Corpn. Ltd. 26.754 0.402 17.71
Housing Development Finance Corpn.Ltd. 11.722 7.146 1.4
I C I C I Bank Ltd. 28.418 4.27 1.174
I T C Ltd. 42.09 0.12 31.138
Infosys Technologies Ltd. 44.936 0 504.222
Larsen & Toubro Ltd. 17.292 0.924 2.162
Mahanagar Telephone Nigam Ltd. 15.55 0.214 29.55
National Aluminium Co. Ltd. 21.026 0.308 7.434
Oil & Natural Gas Corpn. Ltd. 33.596 0.17 8.982
Ranbaxy Laboratories Ltd. 27.894 0.066 25.1
Reliance Energy Ltd. 10.516 0.314 5.57
Reliance Industries Ltd. 15.996 0.802 3.806
Satyam Computer Services Ltd. 31.542 0.21 11.006
State Bank Of India 79.846 0.946 1.192
Tata Motors Ltd. 14.976 0.828 2.146
Tata Steel Ltd. 18.122 1.108 4.526
Videsh Sanchar Nigam Ltd. 31.764 0.042 116.148
Wipro Ltd. 36.356 0.034 214.124
Zee Telefilms Ltd. 6.196 0.09 6.78
TABLE-3
BVPerShare/Adjusted
Firms characteristics Current ratio Closing Price
Company Name AVERAGE AVERAGE AVERAGE
Bajaj Auto Ltd. 1.75 30.49 0.704
Bharat Heavy Electricals Ltd. 1.518 22.226 0.776
Bharat Petroleum Corpn. Ltd. 0.856 35.232 0.712
Cipla Ltd. 2.016 22.662 1.516
Dr. Reddy'S Laboratories Ltd. 2.628 12.842 0.248
G A I L (India) Ltd. 1.31 35.496 0.832
H C L Technologies Ltd. 10.246 32.912 0.25
H D F C Bank Ltd. 1.63 25.258 0.25
Hero Honda Motors Ltd. 1.21 51.406 0.286
Hindalco Industries Ltd. 3.536 17.032 8.478
Hindustan Lever Ltd. 1.128 84.678 0.092
Hindustan Petroleum Corpn. Ltd. 1.122 40.328 0.918
Housing Development Finance Corpn. Ltd. 1.414 47.586 0.426
I C I C I Bank Ltd. 3.31 31.106 0.568
I T C Ltd. 1.248 29.786 3.572
Infosys Technologies Ltd. 3.078 27.672 0.23
Larsen & Toubro Ltd. 1.286 50.054 0.18
Mahanagar Telephone Nigam Ltd. 1.608 25.252 1.142
National Aluminium Co. Ltd. 1.27 51.616 0.686
Oil & Natural Gas Corpn. Ltd. 1.498 36.428 0.996
Ranbaxy Laboratories Ltd. 1.83 53.228 0.452
Reliance Energy Ltd. 1.55 31.03 0.738
Reliance Industries Ltd. 1.27 18.888 0.454
Satyam Computer Services Ltd. 4.886 16.844 0.202
State Bank Of India 1.72 16 1.08
Tata Motors Ltd. 0.894 39.388 0.762
Tata Steel Ltd. 1.1 41.93 1.29
Videsh Sanchar Nigam Ltd. 2.53 72.928 1.226
Wipro Ltd. 2.688 19.14 0.342
Zee Telefilms Ltd. 1.826 26.624 0.648
TABLE-4
365 days
EPS Cash EPS Avg. Traded
Firms characteristics Adjusted Closing Price Adjusted Closing Price Quantity
Company Name AVERAGE AVERAGE AVERAGE
Bajaj Auto Ltd. 0.11 0.146 126772.556
Bharat Heavy Electricals Ltd. 0.084 0.114 703226.214
Bharat Petroleum Corpn. Ltd. 0.148 0.24 826075.054
Cipla Ltd. 0.36 0.396 137802.144
Dr. Reddy'S Laboratories Ltd. 0.042 0.052 181572.322
G A I L (India) Ltd. 0.17 0.252 1220697.534
H C L Technologies Ltd. 0.044 0.048 1380294.004
H D F C Bank Ltd. 0.042 0.042 182238.64
Hero Honda Motors Ltd. 0.128 0.146 359969.556
Hindalco Industries Ltd. 1.178 1.51 85662.244
Hindustan Lever Ltd. 0.036 0.042 1526369.846
Hindustan Petroleum Corpn. Ltd. 0.154 0.214 1432520.39
Housing Development Finance Corpn. td. 0.088 0.094 174829.662
I C I C I Bank Ltd. 0.078 0.078 696329.182
I T C Ltd. 0.91 1.054 492745.624
Infosys Technologies Ltd. 0.084 0.098 669236.396
Larsen & Toubro Ltd. 0.026 0.038 1490768.512
Mahanagar Telephone Nigam Ltd. 0.136 0.228 1518968.294
National Aluminium Co. Ltd. 0.112 0.17 535223.664
Oil & Natural Gas Corpn. Ltd. 0.182 0.314 607148.62
Ranbaxy Laboratories Ltd. 0.078 0.092 594188.754
Reliance Energy Ltd. 0.076 0.136 292307.128
Reliance Industries Ltd. 0.076 0.124 5219287.754
Satyam Computer Services Ltd. 0.048 0.058 11123115.57
State Bank Of India 0.172 0.172 2226206.43
Tata Motors Ltd. -0.02 0.06 2372532.96
Tata Steel Ltd. 0.15 0.276 3907144.816
Videsh Sanchar Nigam Ltd. 0.194 0.224 306889.512
Wipro Ltd. 0.096 0.112 669912.284
Zee Telefilms Ltd. 0.022 0.024 5783566.302
Institutional
Firms characteristics Investors Share
TABLE-6
Interest
Firms characteristics coverage
TABLE-7
Current
Firms characteristics ratio
TABLE-8
365 days
EPS Cash EPS Avg. Traded
Firms characteristics Adjusted Closing Price Adjusted Closing Price Quantity
Company Name AVERAGE AVERAGE AVERAGE
Ashok Leyland Ltd. 0.832 1.612 530227.816
Asian Paints Ltd. 0.076 0.098 20589.288
Aurobindo Pharma Ltd. 0.168 0.21 72556.322
Aventis Pharma Ltd. 0.056 0.07 12169.406
Bank Of Baroda 0.246 0.246 858256.806
Bank Of India 0.288 0.288 936685.108
Bharat Electronics Ltd. 0.156 0.204 210784.036
Bharat Forge Ltd. 0.314 0.608 36072.354
Cadila Healthcare Ltd. 0.066 0.088 81410.44
Container Corpn. Of India Ltd. 0.152 0.172 42286.114
Corporation Bank 0.158 0.158 134030.12
Cummins India Ltd. 0.07 0.086 78753.256
Great Eastern Shipping Co. Ltd. 0.224 0.434 439003.98
Industrial Development Bank Of India Ltd. 0.336 0.468 1043089.31
Ingersoll-Rand (India) Ltd. 0.086 0.1 10523.556
Kochi Refineries Ltd. 0.234 0.366 201437.092
Moser Baer India Ltd. 0.24 0.344 274182.596
Mphasis B F L Ltd. 0.232 0.314 34870.34
Nicholas Piramal India Ltd. 0.268 0.332 19798.624
Nirma Ltd. 0.08 0.134 17555.75
Pfizer Ltd. 0.042 0.046 17041.368
Polaris Software Lab Ltd. 0.05 0.06 1953455.088
Punjab Tractors Ltd. 0.072 0.088 62540.94
Raymond Ltd. 0.182 0.256 189736.076
Reliance Capital Ltd. 0.1 0.166 923284.576
Siemens Ltd. 0.072 0.098 29393.21
Sterlite Industries (India) Ltd. 0.52 0.89 358235.3633
T V S Motor Co. Ltd. 0.914 1.556 65551.176
Tata Teleservices (Maharashtra) Ltd. -0.12 -0.042 1515368.272
Wockhardt Ltd. 0.14 0.158 32265.638
RESULTS:
ANOVA
Total 13743.742 59
Interpretation:
Among the various measures tested, for institutional investor share we have got the F value as
10.059. As the F value is greater than 3 it is significant at 5% level. Therefore we reject the
null hypothesis and accept the alternative hypothesis, which states that there is significant
difference in the means of institutional ownership holdings of small and large size firms and
also we found that stocks of small firms are more neglected by institutional investors than
those of large firms.
Total 36421.662 59
Interpretation:
For the second measure operating ratio, we have got the F value as 0.032. As the F value is less
than 3 it is not significant at 5% level. Therefore we accept the null hypothesis, which states
that there is no significant difference in the means of operating ratio of small and large size
firms and reject the alternative hypothesis, which states that there is significant difference in
the means of operating ratio of small and large size firm.
Total 22.89 59
Interpretation:
For the third measure asset turn over ratio, we have got the F value as 0.001. As the F value is
less than 3 it is not significant at 5% level. Therefore we accept the null hypothesis, which
states that there is no significant difference in the means of asset turn over ratio of small and
large size firms and reject the alternative hypothesis, which states that there is significant
difference in the means of asset turn over ratio of small and large size firm.
Total 21108.847 59
Interpretation:
For the fourth measure Return On Capital Employed we have got the F value as 0.084. As the
F value is less than 3 it is not significant at 5% level. Therefore we accept the null hypothesis,
which states that there is no significant difference in the means of Return On Capital Employed
of small and large size firms and reject the alternative hypothesis, which states that there is
significant difference in the means of Return On Capital Employed of small and large size
firm.
Total 106.58 59
Interpretation:
For the fifth measure Debt Equity ratio, we have got the F value as 0.036. As the F value is less
than 3 it is not significant at 5% level. Therefore we accept the null hypothesis, which states
that there is no significant difference in the means of Debt Equity ratio of small and large size
firms and reject the alternative hypothesis, which states that there is significant difference in
the means of Debt Equity ratio of small and large size firm.
Total 899176.187 59
Interpretation:
For the sixth measure Interest Coverage ratio, we have got the F value as 0.002. As the F value
is less than 3 it is not significant at 5% level. Therefore we accept the null hypothesis, which
states that there is no significant difference in the means of Interest Coverage ratio of small and
large size firms and reject the alternative hypothesis, which states that there is significant
difference in the means of Interest Coverage ratio of small and large size firm.
Total 125.214 59
Interpretation:
For the seventh measure current ratio, we have got the F value as 0.056 As the F value is less
than 3 it is not significant at 5% level. Therefore we accept the null hypothesis, which states
that there is no significant difference in the means of current ratio of small and large size firms
and reject the alternative hypothesis, which states that there is significant difference in the
means of current ratio of small and large size firm.
Total 15080.701 59
Interpretation:
For the eight measure Dividend Payout ratio, we have got the F value as 0.655 As the F value
is less than 3 it is not significant at 5% level. Therefore we accept the null hypothesis, which
states that there is no significant difference in the means of Dividend Payout ratio of small and
large size firms and reject the alternative hypothesis, which states that there is significant
difference in the means of Dividend Payout ratio of small and large size firm.
Total 250.582 59
Interpretation:
For the ninth measure Book Equity to Market Equity ratio, we have got the F value as 2.745 As
the F value is closer to 3 it is significant at 5% level. Therefore we reject the null hypothesis,
which states that there is no significant difference in the means of Book Equity to Market
Equity ratio of small and large size firms and accept the alternative hypothesis, which states
that there is significant difference in the means of Book Equity to Market Equity ratio of small
and large size firm.
Total 3.221 59
Interpretation:
For the earnings ratio, we have got the F value as 0.473, As the F value is less than 3 it is not
significant at 5% level. Therefore we accept the null hypothesis, which states that there is no
significant difference in the means of earnings ratio of small and large size firms and reject the
alternative hypothesis, which states that there is significant difference in the means of earnings
ratio of small and large size firm.
Total 7.383 59
Interpretation:
For the Cash EPS measure, we have got the F value as 1.247 As the F value is less than 3 it is
not significant at 5% level. Therefore we accept the null hypothesis, which states that there is
no significant difference in the means of Cash EPS of small and large size firms and reject the
alternative hypothesis, which states that there is significant difference in the means of Cash
EPS of small and large size firm.
Total 1.83112E+14 59
Interpretation:
For the last measure Traded Quantity ,we have got the F value as 8.075 As the F value is
greater than 3 it is significant at 5% level. Therefore we reject the null hypothesis, which states
that there is no significant difference in the means of Traded Quantity of small and large size
firms and accept the alternative hypothesis, which states that there is significant difference in
the means of Traded Quantity of small and large size firm.
Kruskal-Wallis Test
Institutional Investors TABLE-21
Ranks
VAR00002 N Mean Rank
VAR00001 0 30 37.53
1 30 23.47
Total 60
Test Statistics
VAR00001
Chi-Square 9.731
df 1
Asymp. Sig. 0.002
Interpretation:
Among the various measures tested, for institutional investor share we have got the Chi-Square
value as 9.73. As the Chi-Square value is greater than 3 it is significant at 5% level. Therefore
we reject the null hypothesis and accept the alternative hypothesis, which states that there is
significant difference in the means of institutional ownership holdings of small and large size
firms and also we found that stocks of small firms are more neglected by institutional investors
than those of large firms.
VAR00001 0 30 30.9
1 30 30.1
Total 60
Test Statistics
VAR00001
Chi-Square 0.031
df 1
Interpretation:
For the second measure operating ratio, we have got the Chi-Square value as 0.031. As the
Chi-Square value is less than 3 it is not significant at 5% level. Therefore we accept the null
hypothesis, which states that there is no significant difference in the means of operating ratio of
small and large size firms and reject the alternative hypothesis, which states that there is
significant difference in the means of operating ratio of small and large size firm.
VAR00001 0 30 28.45
1 30 32.55
Total 60
Test Statistics
VAR00001
Chi-Square 0.827
df 1
Interpretation:
For the third measure asset turn over ratio, we have got the Chi-Square value as 0.827. As the
Chi-Square value is less than 3 it is not significant at 5% level. Therefore we accept the null
hypothesis, which states that there is no significant difference in the means of asset turn over
ratio of small and large size firms and reject the alternative hypothesis, which states that there
is significant difference in the means of asset turn over ratio of small and large size firm.
VAR00001
Chi-Square 0.21
df 1
Asymp. Sig. 0.647
Interpretation:
For the fourth measure Return On Capital Employed we have got the Chi-Square value as
0.021. As the Chi-Square value is less than 3 it is not significant at 5% level. Therefore we
accept the null hypothesis, which states that there is no significant difference in the means of
Return On Capital Employed of small and large size firms and reject the alternative hypothesis,
which states that there is significant difference in the means of Return On Capital Employed of
small and large size firm.
Ranks
VAR00001 0 30 28.43
1 30 32.57
Total 60
Test Statistics
VAR00001
Chi-Square 0.84
df 1
Interpretation:
For the fifth measure Debt Equity ratio, we have got the Chi-Square value as 0.084. As the
Chi-Square value is less than 3 it is not significant at 5% level. Therefore we accept the null
hypothesis, which states that there is no significant difference in the means of Debt Equity ratio
of small and large size firms and reject the alternative hypothesis, which states that there is
significant difference in the means of Debt Equity ratio of small and large size firm.
Ranks
VAR00001 0 30 32.97
1 30 28.03
Total 60
Test Statistics
VAR00001
Chi-Square 1.197
df 1
Interpretation:
For the sixth measure Interest Coverage ratio, we have got the Chi-Square value as 1.197. As
the Chi-Square value is less than 3 it is not significant at 5% level. Therefore we accept the null
hypothesis, which states that there is no significant difference in the means of Interest
Coverage ratio of small and large size firms and reject the alternative hypothesis, which states
that there is significant difference in the means of Interest Coverage ratio of small and large
size firm.
Ranks
VAR00001 0 30 27.2
1 30 33.8
Total 60
Test Statistics
VAR00001
Chi-Square 2.142
df 1
Interpretation:
For the seventh measure current ratio, we have got the Chi-Square value as 2.142 As the Chi-
Square value is less than 3 it is not significant at 5% level. Therefore we accept the null
hypothesis, which states that there is no significant difference in the means of current ratio of
small and large size firms and reject the alternative hypothesis, which states that there is
significant difference in the means of current ratio of small and large size firm.
VAR00001 0 30 31.43
1 30 29.57
Total 60
Test Statistics
VAR00001
Chi-Square 0.171
df 1
Interpretation:
For the eighth measure Dividend Payout ratio, we have got the Chi-Square value as 0.171 As
the Chi-Square value is less than 3 it is not significant at 5% level. Therefore we accept the null
hypothesis, which states that there is no significant difference in the means of Dividend Payout
ratio of small and large size firms and reject the alternative hypothesis, which states that there
is significant difference in the means of Dividend Payout ratio of small and large size firm.
Ranks
VAR00001 0 30 26.63
1 30 34.37
Total 60
Test Statistics
VAR00001
Chi-Square 2.941
df 1
Interpretation:
For the ninth measure Book Equity to Market Equity ratio, we have got the Chi-Square value
as 2.941 As the Chi-Square value is closer to 3 it is significant at 5% level. Therefore we reject
the null hypothesis, which states that there is no significant difference in the means of Book
Equity to Market Equity ratio of small and large size firms and accept the alternative
hypothesis, which states that there is significant difference in the means of Book Equity to
Market Equity ratio of small and large size firm.
Earnings TABLE-30
Ranks
VAR00001 0 30 26.55
1 30 34.45
Total 60
Test Statistics
VAR00001
Chi-Square 3.07
df 1
Interpretation:
For the earnings ratio, we have got the Chi-Square value as 3.07, As the Chi-Square value is
greater than 3 it is significant at 5% level. Therefore we reject the null hypothesis, which states
that there is no significant difference in the means of earnings ratio of small and large size
firms and accept the alternative hypothesis, which states that there is significant difference in
the means of earnings ratio of small and large size firm.
VAR00001 0 30 26.68
1 30 34.32
Total 60
Test Statistics
VAR00001
Chi-Square 2.867
df 1
Ranks
VAR00001 0 30 39.8
1 30 21.2
Total 60
Test Statistics
VAR00001
Chi-Square 17.014
df 1
Asymp. Sig. 0
Interpretation:
For the last measure Traded Quantity, we have got the Chi-Square value as 8.075 As the Chi-
Square value is greater than 3 it is significant at 5% level. Therefore we reject the null
hypothesis, which states that there is no significant difference in the means of Traded Quantity
of small and large size firms and reject the alternative hypothesis, which states that there is
significant difference in the means of Traded Quantity of small and large size firm.
Conclusion:
Initially ANOVA a parametric test has been used to test for significance of the differences
among means of various measures. Among the various measures for institutional negligence
we got the f value 10.059 at 5% significance level. It shows that small firms and large firms
are significantly differing in their means of institutional ownership holdings and we found that
stocks of small firms are more neglected by institutional investors than those of large firms.
Second measure book equity to market equity gives the f value of 2.745 that small firms and
large firms are significantly differ. This measure shows the distress level, higher book equity to
market equity greater the distress level. Small firms have greater book equity to market equity
than large firms.
Third measure average traded quantity also gives the f value of 8.075 at 0.006 level of
significance we can easily interpret that means are significantly differ and large firms stocks
are more frequently traded than those of small firms stocks.
Fourth measure cash EPS gives the f value 1.24 at 0/269 level of significance. Other measures
such as operating ratio, asset turnover ratio, return on capital employed, debt equity, interest
coverage, and current ratio. Dividend payout earnings ratios also included and obtained the f
values 0.032, 0.001, 0.084, 0.036, 0.002, 0.056, 0.655, 0.473 respectively but these measures
are not showing significant difference among their means.
Out of twelve measures we found that three measures accept alternative hypothesis which
states that the operating, financial and liquidity characteristics substantially differentiates
small firms from the larger ones. where as other nine measures accept the null hypothesis
which states that the operating, financial and liquidity characteristics does not substantially
differentiates small firms from the larger ones.
Then a non parametric test KRUSKAL-WALLIS test is used to test the differences among
means of different variables in this test we got the chi-square value 9.731 at 5% significance
level for institutional negligence. Here also means of two samples are significantly differ.
Second measure book equity to market equity gives the chi-square value 2.941 at 5% level of
significance. We can interpret that means are different and small firms are more distressed than
large firms.
Third measure average traded quantity gives the chi-square value 17.014 highest among tall the
measures at 5% level of significance large firms stocks are more liquid than small firms stocks.
Fourth measure earnings per share measure give the chi-square value 3.07 at 5% level of
significance. Cash EPS measure also gives chi-square value 2.867 also significantly differ in
the means of small firms stocks and large firms stocks.
Operating ratio, asset turnover ratio, return on capital employed, debt equity, interest coverage,
current ratio. Dividend to payout give chi-square values 0.031, 0.827, 0.21, 0.84, 1.197, 2.142,
0.171 respectively these measures doesn’t differ significantly in the means of small firms and
large firms stocks.
Out of twelve measures we found that four measures accept alternative hypothesis which states
that the operating, financial and liquidity characteristics substantially differentiates small firms
from the larger ones. where as other eight measures accept the null hypothesis which states that
the operating, financial and liquidity characteristics does not substantially differentiates small
firms from the larger ones.
Institutional
Investors Share 10.059 3.14 Reject Accept
To conclude,
The stocks of small firms are significantly less liquid and more neglected by institutional
investors than those of large firms. Small firms have low operating profitability and higher
financial leverage (as revealed by debt equity ratio). Moreover small firms are highly
distressed firms as slow by their high book equity to market equity ratio.
The study shows that the small firms differ from large firms owing to risk characteristics
reflected by the following five measures average daily trading volume, institutional neglect,
book equity to market equity ratio. Debt equity ratio. And operating profit ratio.
Glossary:
Risk-Degree of uncertainty of return on an asset.
Systematic Risk-Risk common to a particular sector or country. Often refers to a risk resulting
from a particular "system" that is in place, such as the regulator framework for monitoring of
financial institutions.
Beta- The measure of an asset’s risk in relation to the market (for example, Nifty the) or to
alternative benchmark.
Specific risk - Also called unsystematic risk or idiosyncratic risk. Specific company risk that
can be eliminated through diversification.
Bibliography
1. Statistical methods- Levin and Rubin
2. Investments-Marcus
4. Applied finance
5. Rolf W Banz: “Relationship between Return and Market value of Common stocks” :
March 1981 ,Journal of financial economics volume 9.
6. Christopher James and Robert o Edmister:-“The Relationship between Common
Stock Returns, Trading Activity and Market Value” September 1983, Journal of
finance volume 38
7. K.C Chan:-“An Exploratory Investigation of the Firm Size Effect” 1985, Journal of
financial economics, volume 14.