Firm Size, Book-to-Market Ratio and Stock Returns in Nepal

Niyam Raj ShresthaPublic Youth CampusFaculty of ManagementTribhuvan University

Presentation on

Background

• Average returns on stock of small firms were higher than the average returns on stocks of large firms(Banz,1981).

• Relevant to examine the existence of size and book-to-market effect in the Nepalese stock market

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OBJECTIVES OF STUDY

• To evaluate the factors affecting stock returns in the stock market in the context of Nepal. • To assess the relationship between the

firm size, book-to-market ratio and Stock returns of Nepali firms.

• To analyze the effect of size and book-to-market equity ratio on the stock returns.

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DATADistribution of Population and Sample

Listed Companies N n %Commercial Banks 24 17 70.83 Development Banks 57 18 31.58 Finance Companies 71 37 52.11 Insurance Companies 21 11 52.38 Manufacturing Companies 18 1 5.56 Others (Hotels, Hydro, Trading, Telecome & Film) 14 1 7.14 Total 205 85 41.46 Source: NEPSE

Total 85 sample firms for 133 observations for the period of 2008 and 2010

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METHODOLOGY

• descriptive research design– Extreme size deciles portfolios as the small firms

(size deciles 1) and big firms (size deciles 10)• Causal comparative research design-As Fama and

French 1992» MODEL:

– Rit = α + b1t LMEit + et....................................................i

– Rit = α + + b2t BE/MEit + et.........................................ii

– Rit = α + b1t LMEit + b2t BE/MEit + et..................iii

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Analysis of DataSize (Market Value of Equity in millions) and Book-to-Market Ratios for NEPSE

listed Firms: Mid-July, 2008 – Mid-July, 2010

Firms Listed in NEPSESize (Rs 000,000) Book-to-Market

Year Obs. Median Mean Std. Dev. Median Mean Std. Dev.Mid-July,

2009 62 1.2917 6.132 10.7048 0.2316 0.323 0.2389Mid-July,

2010 71 1.0743 3.2722 5.6252 0.483 0.5353 0.2855Total 133 1.1697 4.6053 8.4727 0.4041 0.4363 0.2845

Source: Data from NEPSE

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Major Findings

• Portfolios Sorted by Size– Returns are in increasing trend– As size increases, the return also increases

• Portfolios Sorted by Book-to-Market Ratio (BE/ME)– inverse relation between stock returns and book-

to-market equity ratio.• increased in firms portfolio deciles formed by book-to-

market ratio the return have decreased.

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Major Finding…cont…

Estimated Relationship from Cross-Sectional Regression of Stock Returns on Firm Size and Book-to-Market Equity Ratio for 85 Sample Firms with 133 observation:

Mid-July 2008 to Mid-July 2010Dependent Variable: Stock Returns

Model Intercept LME BE/ME F Adj. R2 SE1 -0.1829 0.0044 0.008** 0.0076 0.7704

(-2.6122*) (-0.0893)

2 0.0204 -0.456 4.261* 0.0238 0.7584(-0.1739) (-2.0642*)

3 0.1615 -0.0844 -0.6873 3.155* 0.03116 0.7555 -1.053 (-1.4199) (-2.5102*)

Source: Data from NEPSE

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Major Finding…cont…

• Univariate model:– the stock return and book-to-market equity ratio has

negative relation– the return and size of the firm has positive relation• indicating the strong explanatory power to

explain in stock the coefficient of book-to-market.• relationship between size and common stock

return is positive.• coefficient of size is not very strong to predict the

relationship • book- to- market equity ratio is worth than size to

explain cross-section stock return04/13/2023 © Niyam Shrestha, 2012 9

Major Finding…cont…

• Multivariate model:–the book-to-market is negatively

related with stock return –book-to-market is strong variable–firm size shows no significance

relation with stock return.

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Concluding Remark

• there is positive relationship between the earning yields and size

• the book-to-market ratio variable has explanatory power to explain the cross-section of the stock return in Nepalese stock market.

• negative relation between stock returns and book-to-market equity ratio in univariate and multivariate analysis

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Concluding Remark

• invest in the stocks of large firms.• firm should focus on increasing the size to

increase their stock return. • a stock with low BE/ME ratio is

recommended for investors for investment. • recommended to firms to maintain low

BE/ME ratio to increase their stock return• large numbers of macroeconomic variables

which affect stock returns

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THANK YOU

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