Does firm size affect stock returns? Evidence from the Zimbabwe Stock Exchange

Abstract

The objective of the study is to investigate the relationship between firm size and stock returns for firmslisted on the Zimbabwe Stock Exchange (ZSE) between June 2009 and July 2013. We adopt the regressionmodel employed by Banz in 1981, with innovations. The regression is based on constructed portfolios,with market capitalization as the basis for portfolio construction. The portfolios comprise at most 5 stocks,and stocks are sorted in ascending order by market capitalization for selection into portfolios. The sampleperiod spans from June 2009 to July 2013. We select the sample period beginning from 2009 because thatis when the government of Zimbabwe demonetized the Zimbabwean dollar and adopted a basket of foreigncurrencies as legal tender. The data prior to 2009 is also distorted by hyperinflation and therefore is notreliable. The sample size covers 64 companies listed on the ZSE, of which 60 are industrial and 4 aremining companies. We find that the estimated coefficient for the firm size factor is not significant at the5% level of significance. Therefore, firm size has a positive yet insignificant effect on stock returns forcompanies listed on the ZSE for the period June 2009 to July 2013. Contrary to the general empiricalfindings, larger firms on the ZSE tend to exhibit higher risk-adjusted returns than smaller firms.