Cross Sections of Expected Return and Firm Size: An Empirical Study on the Colombo Stock Market

The empirical test of cross sectional relationship between stock return and firm size in emerging stock markets seems hard to find in literature. Therefore, this study examines weather cross sectional relationship between stock return and firm size is exist on stocks returns in the Colombo stock market as an emerging capital market. All sample of stocks are formed into ten portfolios based on market capitalization and equally weighted average monthly portfolio return is calculated and assigned to respective decile portfolios at the end of each year. The existence of cross sectional relationship between stock return and firm size is tested by Fama and MacBeth (1973) two step procedure. The study concludes that there is a cross sectional relationship between stock return and firm size exist in the Colombo stock market during the study period and the finding consistent with the previous studies on USA and international markets.