FIRM SIZE, BOOK-TO-MARKET EQUITY AND THE STOCK RETURNS: ANALYSIS OF NIGERIAN STOCK MARKET

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FIRM SIZE, BOOK-TO-MARKET EQUITY AND THE STOCK RETURNS: ANALYSIS OF NIGERIAN STOCK MARKET

1Agbam, Azubuike Samuel,  1Anyamaobi, Chukwuemeka & 2Udo, Ephraim Okon

1Department of Banking and Finance

1Department of Mathematics/Statistics and Computer Science

2Rivers State University, Nkpolu-Oroworukwo, Port Harcourt, Nigeria

Email: azubuikesamuelagbam@yahoo.com, ephraimokon@rocketmail

Corresponding author: Agbam, Azubuike Samuel

ABSTRACT

Although the Capital Asset Pricing Model (CAPM) has been one of the most useful and frequently used theories in determining the required rate of return of a security, the application of this model has been controversial since early 1960s. The CAPM was introduced by Jack Treynor, William Sharpe, John Lintner and Jan Mossin independently, building on the earlier work of Harry Markowitz on diversification and Modern Portfolio theory.  This study employs Fama and French (1993) multifactor model to investigate the significance of firm size and book-to-market ratio in explaining variations in returns of stocks listed on the Nigerian equity market using monthly stock data of 59 randomly selected Nigerian stocks from 2012 to 2015 collected from the Nigerian Stock Exchange. The empirical results of the classical Ordinary Least Square (OLS) regression analysis of the test of the multifactor model found that value effects are not priced but size effects are significantly priced. To the contrary, robust OLS confirms both size and value effects, suggesting that investors are rewarded for taking both size and value risk. Keyword:CAPM, firm size, book-to-market equity, stock market, Nigeria