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Size Effects in Indian Stock Market.

SIZE EFFECTS IN INDIAN STOCK MARKET by Vanita Tripathi, Serial Publications, New Delhi, 2008, pp. 194

Stock market is experiencing phenomenal expansion, its share in the GDP has witnessed growth and accounts for about 80 percent of GDP at present and has been extensively researched by scholars.

The present book, "Size Effect in Indian Stock Market" by Vanita Tripathi is an attempt to study whether size effect exits in the Indian market and also the causes of such size effect. The study is for a sample of 482 companies for the period 1990 to 2003 divided over three sub-periods-October 1990 to September 1994, October 1994- September 1998; and October 1998--September 2003. The book is spread over eight chapters and contains a detailed theoretical framework, literature review and results of the analysis. Empirical model with five firm specific variables namely, book to market ratio, institutional neglect, average daily trading volume, debt-equity ratio, and operating profit ratio has been used to analyse the size effect.

The study shows that a strong size effect existed in the Indian stock market during the entire period of study irrespective of the size measure used. The size premium is substantially high when market capitalization is used; the other measures of size used for analysis, namely, enterprise value, net fixed asset, net sales, total assets and net working capital, also had positive effects. The size effect was quite robust during the first and the third periods, and was weak during the second period. Size based investment strategy was found to provide economically feasible extra-normal returns and this "size effect" lead to investment strategy (buy small firm stocks and sell short large firm stock) of arbitrage which could be exploited by the investment analysts, mutual fund managers and individual investors. Further, there was the absence of any seasonality or cyclicity in capturing the size effect, unlike that of in the US or other matured markets

As regards differences in the characteristic of small and large firms, the study found that the stocks of small firms are less liquid and more neglected by institutional investors. Small firms are perceived to be firms in distress and possess low operating profitability coupled with high financial leverage. The study strengthens the argument of a risk story for the documented size effect as small firms appear to be riskier than large firms. However, "the size acted a proxy for certain fundamental risk actors which did not have any basis in extant financial models"

Further, small firms tend to concentrate in certain poor performing sectors of the economy (like, chemicals, textiles, capital goods, consumer durables) while large firms are healthy and found in highly profitable sectors (namely, IT, banking, and FMCG). However, size effect cannot be attributed to any sector premium, rather it may be firm specific.

The study is exhaustive and is a rich contribution on the security market. It will be of interest to academicians, researchers, policy makers and practioners. Mutual fund mangers, financial analysts and investors will find the study useful while devising size based investment strategies to have extra-normal returns in the stock market.

Nand Dhameja


Indian Institute of Public Administration

New Delhi 110002
COPYRIGHT 2008 Shri Ram Centre for Industrial Relations and Human Resources
No portion of this article can be reproduced without the express written permission from the copyright holder.
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Author:Dhameja, Nand
Publication:Indian Journal of Industrial Relations
Geographic Code:9INDI
Date:Jul 1, 2008
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