Presentation in International Seminar on "New Dimensions and Innovations in Management" held on June 6-7, 2012 in Kathmandu, Nepal.

1. Presentation on
Firm Size, Book-to-Market Ratio
and Stock Returns in Nepal
Niyam Raj Shrestha
Public Youth Campus
Faculty of Management
Tribhuvan University

2. 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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3. 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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4. DATA
Distribution 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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5. 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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6. Analysis of Data
Size (Market Value of Equity in millions) and Book-to-Market Ratios for NEPSE
listed Firms:
Mid-July, 2008 – Mid-July, 2010
Firms Listed in NEPSE
Size (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 0.2389
Mid-July,
2010 71 1.0743 3.2722 5.6252 0.483 0.5353 0.2855
Total 133 1.1697 4.6053 8.4727 0.4041 0.4363 0.2845
Source: Data from NEPSE
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7. 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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8. 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 2010
Dependent Variable: Stock Returns
Model Intercept LME BE/ME F Adj. R2 SE
1 -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 8
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9. 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 return
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10. 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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11. 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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12. 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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13. THANK YOU
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