Abstract
The book to market capitalization of firms become one of the common risk factor on asset pricing models. The impact of book to market equity of firms on stock returns was initially found in US market and subsequently tested in many international markets both in developed and developing markets. However, the empirical test of value effect in Sri Lankan stock market seems hard to find in literature. Therefore, this study examines existence of value effect on stocks returns in the Colombo stock market as an emerging capital market. The analysis show a weak positive cross sectional relationship between stock return and Book to Market ratio of stock and existence of value effect.
Highlights
Treynor (1961), Sharpe (1964), Lintner (1965) Stambaugh (1982) found a flat relationship and Mossin (1966) version of Capital asset pricing model (CAPM), version between stock return and market factor
The given average annual monthly portfolio return of each decile portfolio is calculated by aggregating whole average annual monthly return of each stock and divided by number of stocks outstanding of the respective portfolio
This study examines existence of value effect on stocks returns in the Colombo stock market
Summary
Treynor (1961), Sharpe (1964), Lintner (1965) Stambaugh (1982) found a flat relationship and Mossin (1966) version of CAPM, version between stock return and market factor This of Capital asset pricing model (CAPM) is findings risen the doubt on market factor as commonly used to estimate cost of capital and a single factor to determining the expected to value financial asset. Earlier studies immediate after the Rosenberg, Reid, and Lanstein (1985) found formulation of the model found supportive the Book to market equity is able to determine evidences for CAPM that is there is a liner the variations of expected return of stock. The return (1970), Jensen, Black, and Scholes (1972) and differences between higher and lower book to Journal of Management - Vol 12 No. April 2015 market stocks is known as value premium
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