Abstract:
Small firm effect was brought in to the notice of investment community in 1981 by Rolf
Banz and Mark R Reinganum, through two different lines of independent studies
conducted on the existence of market anomalies, which contradict with the efficient
market hypothesis forwarded by Eugine Fama in 1970.
There are a large number of research studies conducted in this area, using stock market
information collected from developed stock markets like New York Stock Exchange and
American Stock Exchange. However, studies conducted on the smaller developing share
markets like Colombo Stock Exchange are very rare. Hence conducting a similar study
using share market information collected from CSE will be of prime importance for Sri
Lanka investors who are keen in using market anomalies to improve their profitability of
equity investments.
This study attempts to examine the relationship between the firm size and average
return of Sri Lankan capital market. However, there is no firm relationship between
these two variables over the sample period. In the Sri Lankan capital market context
beta coefficient, price/earning ratio, liquidity ratio, book to market value, return on
equity, dividends per share and debt/equity ratio are important to determine average
return of investing in the firms. Therefore the study provides better guidelines for
investors and portfolio managers to make optimal investment decisions.
