Abstract
Company specific characteristics, such as size, might have an impact on stock performance. In fact, there is an extensive literature supporting the existence of a small capitalization effect stock in many markets, such as the U.S. (Fama, 1992), UK (Andrikopoulus, 2008)) and Thailand (Alfonso, 2016). In this article the Indonesian case is presented. Indonesia has a growing economy and financial markets and is one of the ASEAN countries. The performance of small and large capitalization stock from 2010 to 2016 was analyzed in this article. The results, at a 5% confidence level, indicate that the assumption that the returns from small and large capitalization stocks for that period being the same cannot be rejected. The result was consistent when analyzing the entire period or when analyzing every single year independently. The test used to compare the performance of small and large capitalization stocks was the Wilcoxon test. The risk adjusted returns were also compared with the conclusion remain the same. The returns of the index as well as the logarithmic returns, during the same, period did not appear to follow a normal distribution. Normal distribution is not an assumption required by the Wilcoxon test. The idea that small capitalization stocks outperformed large capitalization stocks cannot be supported by either the results of the statistical tests or by the actual returns during that period. The finding supports that there are significant differences between the behavior of the stock market in Indonesia and other comparable countries like Thailand.
Highlights
In some countries it has been observed that listed stocks with relatively small market capitalization tend to outperform companies with large capitalization (Collins 1990)
See for instance (Switzer 2012) is the concept that perhaps that outperformance is related to small capitalization companies being riskier than large capitalization stocks and investors demanding a higher expected return on those stocks in order to invest
In the logarithmic return according to both the Anderson Darling and the Lillie test, at 5% significance, for small capitalization stocks did followed a normal distribution
Summary
In some countries it has been observed that listed stocks with relatively small market capitalization tend to outperform companies with large capitalization (Collins 1990). Large companies are likely to attract a higher degree of attention and a larger amount of analyst covering such company. The larger the amount of analysts covering a stock, all else equal, the more difficult it is to find previously unknown information with investment value on the company. As outperforming becomes more difficult speculative investors move to those shares that might offer more information discovery opportunities. Another explanation, see for instance (Switzer 2012) is the concept that perhaps that outperformance is related to small capitalization companies being riskier than large capitalization stocks and investors demanding a higher expected return on those stocks in order to invest. The corporate governance issue in the case of Indonesia has been mentioned by some authors like (Nurazi, 2015)
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