Stock Return, Size and Market-to-Book Ratio: Evidence from Selected Indian Industries

Abstract

This paper examines the re lati onship between expected tock returns and size, and market-to-book ratio of selected compa nies with a sa les turnover of more than 500 crores. The selected companies a r e gro uped into five indu trie on th e basis of industrial classification of Indi an emerging markets: Automobile, Cement, Diversified, Pharmaceuticals and Textile industry. Overall, we found no size effect in all the markets and a significant marke t-to-book effect in all the groups. When the test allow for both variable , the negative relationship betwe n size and average return is less significa nt; the inclusion of market-to-book equity seems to absorb the role of size in se lected Indian stock returns. Although small firm's have to a certain extent higher average return than large firms in elected Indian markets, the market-to-book variables seems to have a consistently stronger role in average returns.