Abstract:
As an extension of research explaining the behavior of
stock returns, the present study examines the relationship
between firm size (as measured by market capitalization)
and stock returns . This anomaly , now known as the "size
effectu , has been the focus of many recent studies .
According to this anomaly small firm stocks tend to earn
statistically higher returns than large firms .
Since the relationshi p between firm size and stock returns
lacks empirically tested evidence from the Karachi Stock
Exchange (KSE) thus this study concentrates on determining
this relationship and exploring its nature .
A sample of twenty firms was selected from the KSE 100
index and two portfolios were constructed namely "smallcapu
and "large-capu. Then Pearson Product Moment
Correlation was applied to find the degree of relation
between average stock returns and market capita l ization for
all the firms of each portfolio . Thus when market
capitalization is used as a measure of firm size the "sizeeffectu
cont i nues to be useful although somewhat weaker for
Pakistani stocks.
For further analysis and confirmation of these results
other measures of firm size like total assets , revenues and
employment should be included while increasing the sample
size .
