The Small Firm Effect: The Case of Ghana Stock Exchange

Abstract The small firm effect is a stock market anomaly which shows that firms with smaller market capitalization earn higher returns than firms with larger market capitalization. The objective of this study was to test whether the small firm effect exists on the Ghana Stock Exchange (GSE). The study adopted an explanatory research design. The study used 30 listed firms that had traded consistently from 2009 to 2016 as sample. The study created quartile portfolios in ascending order for the stocks based on market capitalization. The first and fourth portfolios were used as small and large firm portfolios. The study also calculated monthly returns for the stocks for the study period. The study then used secondary data from the GSE, Bank of Ghana, Ghana Statistical Services and Annual Reports Ghana to conduct a regression analysis. The OLS regression analysis was used to test for the relationship between size and returns on the GSE. The regression results showed that there was a statistically insignificant and weak positive relationship between stock market returns on the GSE and small firm returns. On the contrary, large firms on the GSE showed a statistically significant and strong positive relationship between stock market returns on the GSE and small firm returns. Thus, the study concluded that small firm effect was not present on the GSE since large firms showed higher returns than small firms. The study then recommended that the Securities and Exchange Commission formulate policy to reduce the impact large firm size has on stock returns.