On the Cross-Section of Stock Returns: The Effect of Sample Size on the Research Findings

Mohanty, Pitabas (1998) On the Cross-Section of Stock Returns: The Effect of Sample Size on the Research Findings. TAPMI, Manipal.

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Abstract

Researchers of the Indian stock market often do the research work by taking a sample of some hundred-odd stocks (mostly the indexed stocks).! They justify this by saying that most of the stocks in India do not trade and hence it is not desirable to include them in the sample. However, such research findings have very limited applications. This paper has attempted to see if the findings will be any different if a larger sample is used. It has been decided to test for the existence of PE effect, the book-to-market effect and the size effect in the Indian stock market. The test has been done both on a smaller sample of 112 companies and a larger sample of2135 companies. The findings are completely different for the two samples. The smaller sample shows that all the above mentioned effects do exist in India though the PE effect and the book-to-market effect are found to be the most dominant ones. The findings are, however, completely different in the larger sample of2135 companies. Here, the stocks with the highest PE have done much better compared to the stocks with the lowest FE. Similarly stocks of companies with high book-to-market have done better than stocks of low book-to-market companies. However, the size-related findings are not very obvious. On further investigation it is found that almost 75% of the stocks of the smaller sample are part of the highest PE group in the larger. sample. Thus most of the non-index stocks in India have done miserably in the sample period. Most of the non-index scripts are very illiquid in India. Thus when one buys a non-indexed stock one also bears the liquidity risk along with the other risks. This is probably one of the reasons why the findings of the smaller sample and the larger sample are different. It is also attempted to see which of the three effects is the most dominant. It is observed that once the PE risk and the liquidity risk are adjusted for, the book-to-market and size of the company do not have any additional explanatory power. However, one thing is obvious. Studies based on a sample of some hundred-odd companies (mostly the indexed stocks) cannot be generalised to the entire population.

Item Type:	TAPMI Working Papers
Uncontrolled Keywords:	Finance; Stock Returns
Subjects:	Finance
Divisions:	Finance and Strategy
Depositing User:	Ms. Vanitha K
Date Deposited:	17 Nov 2018 10:23
Last Modified:	04 Feb 2019 05:01
URI:	http://tapmi.informaticsglobal.com/id/eprint/391

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