Company Fundamentals and Equity Returns in India

40 Pages Posted: 24 Aug 2008

See all articles by Vanita Tripathi

Vanita Tripathi

Department of Commerce, Delhi School of Economics,University of Delhi, India; University of Delhi India - Delhi School of Economics - Department of Commerce

Multiple version iconThere are 2 versions of this paper

Date Written: May 13, 2008

Abstract

This paper examines the relationship between four company fundamental variables (viz. market capitalization, book equity to market equity ratio, price earnings ratio and debt equity ratio) and equity returns in Indian stock market using monthly price data of a sample of 455 companies forming part of S&P CNX 500 Index over the period June 1997 to June 2007. We also investigate whether the inclusion of any one or more of these fundamental variables can better explain cross sectional variations in equity returns in India than the single factor CAPM. We find that market capitalization and price earnings ratio have statistically significant negative relationship with equity returns while book equity to market equity ratio and debt equity ratio have statistically significant positive relationship with equity returns in India. The investment strategies based on these variables produced extra risk adjusted returns over the study period. Using Davis Fama and French(2000) methodology we find that Fama-French three factor model ( based on market risk premium, size premium and value premium) explains cross sectional variations in equity returns in India in a much better way than the single factor CAPM. These results have important implications for market efficiency, asset pricing and market microstructure issues in Indian stock market.

Keywords: Size Effect, Value effect, P/E effect, Leverage effect, CAPM, Asset pricing

JEL Classification: G12, G14

Suggested Citation

Tripathi, Vanita and Tripathi, Vanita, Company Fundamentals and Equity Returns in India (May 13, 2008). 21st Australasian Finance and Banking Conference 2008 Paper, Available at SSRN: https://ssrn.com/abstract=1247717 or http://dx.doi.org/10.2139/ssrn.1247717

Vanita Tripathi (Contact Author)

University of Delhi India - Delhi School of Economics - Department of Commerce ( email )

Department of Commerce
Delhi University
Delhi, 110007
India

HOME PAGE: http://people@du.ac.in~vtripathi/

Department of Commerce, Delhi School of Economics,University of Delhi, India ( email )

Department of Commerce, Delhi school of Economics,
Delhi, Delhi 110007
India

HOME PAGE: http://people@du.ac.in~vtripathi/

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