Abstract: Prior research in Indian equity market has failed to fully document the well-known influences of size and book-to-market effects that have been evidenced in other markets. So, the question remains as to whether value premium exists in India or whether it has simply failed to be adequately explored. Moreover, no robustness check has been performed on this. This study uses buy-and-hold strategy for a short span of one quarter to a relatively longer span of two years over the 10-year period from June 2003 to September 2013 and finds no evidence of value premium in the Indian market. This explains the presence of an anomaly as the results are contrary to what have been found in other countries.IntroductionDeterminants of share price movements are one of the key concerns for researchers in the field of Finance. The earlier studies have developed single-factor models and multi-factor models in order to explain such movements. The groundbreaking work of Fama and French (1992) shifted the focus on several key factors, including size and book-to-market ratio.Prior researches in the area have largely been confined to the US market may be because of accurate data availa bility regarding equity prices and company-specific financial information. Using Indian data, only a few studies have been performed, and mostly these are limited in depth and time series coverage.A few studies have attempted to test the three-factor model in India. The results have been found to be mixed and generally weak as compared to the US findings. For instance, Bahl (2006) tests the three-factor model using 79 stocks listed in BSE-100 stock market index, while Connor and Sehgal (2001) study the three-factor model using data of 364 companies from the June 1989 to March 1999. These studies find evidence that the three-factor model suggested by Fama and French (1992) explains returns better than the traditional Capital Asset Pricing Model (CAPM), but the results are not so much conclusive. For example, there is mixed evidence for parallel market, size and book-to-market factors in earnings of stocks in India. The findings of the said studies indicate about (negative) size premium and insignificant (positive) value premium, although robustness check has not been performed.This study, to the best of our knowledge, presents the first comprehensive examination of the presence of value premium in the Indian market. The paper is structured as follows: it reviews the existing literature available in this context, followed by the discussion of data and methodology used in the study. Subsequently, the results are documented with analysis, and finally, conclusion is offered.Literature ReviewThe seminal study by Fama and French (1992) posits that there are a few factors which are capable of explaining variation in equity returns. They successfully analyze the influence and association of different key attributes on portfolio returns. Among a number of factors, two have become generally accepted and widely used. They are: size and book-to-market ratio.The relationship between size of a firm and corresponding returns is well documented in literature. Banz (1981) is the first to describe an inverse relationship between market value of equity and returns. Returns to the smaller sized firms significantly outperform returns of the larger size stock. Beedles et al. (1988) find that the size premium is more pronounced in Australia.In addition to size and beta, Fama and French (1992) introduce book-to-market ratio as a distinguishing factor for explaining returns. Specifically, they show that portfolios formed on the basis of serially ranked book-to-market ratios exhibit differential performance. Portfolios comprising firms with high book-to-market ratios usually outperform portfolios which comprise firms with low book-to-market ratios. This is termed as value premium. This is because firms with high book-to-market ratios have their value embedded in their book valuation, whereas firms with low book-to-market ratios have their value embedded in market expectations of future growth opportunities. …
Publication Year: 2015
Publication Date: 2015-04-01
Language: en
Type: article
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Cited By Count: 1
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