Explaining Small Size Firm Returns through Growth Premium in Indian Capital Markets

An Empirical Investigation

Rama Seth, Ankur Mehra

Research output: Contribution to journalJournal articleResearchpeer-review

Abstract

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.
Original languageEnglish
JournalFinance India
Volume33
Issue number2
Pages (from-to)347-358
Number of pages12
ISSN0970-3772
Publication statusPublished - 2019

Bibliographical note

CBS Library does not have access to the material

Cite this

@article{27593a497c2a44028f52b06fd10dd5b8,
title = "Explaining Small Size Firm Returns through Growth Premium in Indian Capital Markets: An Empirical Investigation",
abstract = "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.",
author = "Rama Seth and Ankur Mehra",
note = "CBS Library does not have access to the material",
year = "2019",
language = "English",
volume = "33",
pages = "347--358",
journal = "Finance India",
issn = "0970-3772",
publisher = "Indian Institute of Finance",
number = "2",

}

Explaining Small Size Firm Returns through Growth Premium in Indian Capital Markets : An Empirical Investigation. / Seth, Rama; Mehra, Ankur.

In: Finance India, Vol. 33, No. 2, 2019, p. 347-358.

Research output: Contribution to journalJournal articleResearchpeer-review

TY - JOUR

T1 - Explaining Small Size Firm Returns through Growth Premium in Indian Capital Markets

T2 - An Empirical Investigation

AU - Seth, Rama

AU - Mehra, Ankur

N1 - CBS Library does not have access to the material

PY - 2019

Y1 - 2019

N2 - 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.

AB - 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.

M3 - Journal article

VL - 33

SP - 347

EP - 358

JO - Finance India

JF - Finance India

SN - 0970-3772

IS - 2

ER -