Explaining Small Size Firm Returns through Growth Premium in Indian Capital Markets: An Empirical Investigation

We find that small companies consistently earn higher returns than big companies in the Indian capital market. Also, instead of value premium, as in the US market, there is growth premium that works in the Indian capital market. We use the Fama-French 2006 methodology and find that investors earn growth premium on three out of the four smallest size quintiles, but for the largest size quintile they earn a high value premium. Further, we find that though CAPM is able to explain the value premium in big stocks, it fails to explain the growth premium in small stocks. This study has clear implications for evaluating the performance of managers. An investor should use the market factor, the SBM factor and an alternate form of the HML factor - GMV or Growth min val for evaluating the performance of managers investing in small firm. For evaluating the performance of managers investing in big firms only market factor i.e. CAPM should be used.