Price to earnings ratio, market to book value ratio, and size effect in Kuala Lumpur Stock Exchange

Abstract

Abnormal stocks` returns obtained from cross-sectional time series are reported in a lot of financial literature. To find out similar phenomenon, this paper undertook a research work focused on the size effect in Kuala Lumpur Stopck Exchange. The sample covers most listed stockks in KLSE from September 1987 to October 1997. The stocks are sorted, pooled and formed into cross-sectional portfolios to compare the returns of them. Three models, namely two OLS models and one SUR model, are applied in the research. Besides size affect, two other variables, P/E and M/B (Markket Price to Book Value Ratio) are also included in this research. The result indicalted the existence of size effect in KLSE as found in other stock markets. However, as for P/E and M/B, we could not reach to a clear-cut and concrete conclusion that these two variables were also able to generate abnormal returns. The finding of size effect in KLSE may add some evidence to the conclusion that this anomaly generally exists. The absence of P/E and M/E effect may be due to highly speculative nature of KLSE. More research work could be done to improve and refine the findings and that may also lead to different results.