Investigation of the relationship between firm size and stock returns: An applied analysis at ISE

IIABSTRACTINVESTIGATION OF THE RELATIONSHIP BETWEEN FIRM SIZE ANDSTOCK RETURNS: AN APPLIED ANALYSIS AT ISEEmrah ARIOĞLUMaster Thesis, Department of Business AdministrationSupervisor: Prof. Dr. Serpil CANBAŞJanuary 2007, 163 pagesContrary to the Efficient Market Hypothesis, it is found that the firm sizeanomaly exists at many developed capital markets and at the capital market in Turkey.In this study whether a relationship between firm size and common stock returns existsat Istanbul Stock Exchange in July 1993-June 2004 period or does not exist, isinvestigated by applying different methods. In addition to this, if the mentionedrelationship exists, it is investigated whether abnormal returns can be gained by makinguse of this relationship or not. For this purpose, firstly, the relationship between firmsize and common stock returns, is analysed by using the mean monthly returns ofportfolios constructed based on various methods. Then, the firm size, the book-to-market ratio of equity and the price of the common stock is added to the Capital AssetsPricing Model, in addition to the beta, as explanatory variables. By running cross-sectional regressions, the strength of the relationship between firm size and commonstock returns is investigated. Lastly, the relationship between firm size and commonstock returns is investigated by applying Fama and French?s 3 Factor Model. As a result,it is found that a negative relationship between firm size and common stock returns existand that abnormal returns can be gained by making use of this relationship at IstanbulStock Exchange in both July 1993-June 2004 period and in the sub-periods.Keywords: Efficient Market Hypothesis, Firm Size Anomaly, 3 Factor Model, CapitalAssets Pricing Model, Anomaly.