Size effect on stock returns in Sri Lankan capital market

Abstract

This study examines weather size effect exist on stocks returns in the Colombo stock market as an emerging capital market. The sample of study includes all nonfinancial companies listed on main board of Colombo Stock Exchange during the period from 2000 to 2013. The size of the firm is measured based on market capitalization at the end of each year. All sample of stocks are formed into five portfolios based on market capitalization and equally weighted average monthly portfolio return is calculated and assigned to respective quintile portfolios at the end of each year. The existence of size effect is estimated by the differences of portfolio return between smallest and biggest quintile portfolio. The analyses show that the smallest quintile portfolio of stocks earns significantly higher return than biggest quintile portfolio of stocks. Therefore, the study concludes that the size effect exists in the Colombo Stock Exchange during the study period and the finding consistent with the previous studies on USA and international markets.