Book to market ratio and expected stock return: an empirical study on the Colombo stock market

Abstract

The book to market capitalization of firms become one of the common risk factor on asset pricing models. The impact of book to market equity of firms on stock returns was initially found in US market and subsequently tested in many international markets both in developed and developing markets. However, the empirical test of value effect in Sri Lankan stock market seems hard to find in literature. Therefore, this study examines existence of value effect on stocks returns in the Colombo stock market as an emerging capital market. The analysis show a weak positive cross sectional relationship between stock return and Book to Market ratio of stock and existence of value effect.