Role of size and risk effects in value anomaly: Evidence from the Indian stock market

Abstract

Portfolios of companies with high book-to-market (BTM) ratio (low Price-To-Book (PB) ratios, Value firms) outperform those with companies with low BTM ratio (high PB ratios, Growth firms). In literature, this is known as the Value Anomaly. This anomaly is related to the third factor in the three-factor model of Fama and French, and is commonly used to explain the cross section of returns. Studies on the Value Anomaly in the Indian Stock Markets have yielded mixed results. Using a longer span of data and a larger set of companies, this study explores and observes the Value Anomaly in the Indian Stock Market. The contribution of size and systematic risk towards the behaviour of the Value Anomaly is studied. We observe that Value Anomaly exists in India, but with growth portfolios outperforming value. A critical analysis reveals possible linkages to firm size.