Impact of Market Capitalisation on Market Performance of the Companies - Research Proposal Example

Impact Of Market Capitalisation On Market Performance Of The Companies A Thesis Proposal Which companies outperform? Submitted by: Submitted to: Date: Table of Contents Table of Contents 2 Background 3 Aims and Objectives 3 Research Question 4 Literature Review 4 Methodology 6 Bibliography 7 Background Market Capitalisation of a company refers to the measure of a company’s size and the total stock market value of the company.1 The question of the selection of market cap while investing in the companies is very important for all the investors. The typical questions come in the mind, deals with whether, market cap actually affects the performance of the companies or not. If yes, then which range of market cap companies outperform the others. Does the relationship exist between market cap and performance of companies, same for all market indices? For determining the answers to these questions, there is a need for conducting a research study, which may provide the guidelines to the investors while selecting the right stocks. Aims and Objectives The two major objectives of this research study are listed as under: Identification of any significant relationship between market capitalisation and performance within three categories of companies i.e. Small-cap, Mid-cap and Large-cap Small-cap, Mid-cap and Large-cap companies show varied performance based on the difference in time-horizons and geographic setting thereby creating discrepancies in the expected/predicted and actual movement in company performance To assist the interested parties such as investors in determining which stocks may outperform the others Research Question The research questions for this study are: Do relatively small-cap companies outperform relatively large-cap companies in the short-run. Do relatively small-cap companies outperform relatively mid-cap companies in the short-run. Do relatively mid-cap companies outperform relatively large-cap companies in the short-run. Literature Review Fisher (1966), Fisher and Lorie (1968, 1970, and 1977) and Ibbotson and Sinquefield (1976) studies are primarily based to determine the long-run returns of different cap companies.2 According to Casey, Quirk & Associates (2006), “The Small Cap universe has grown much faster than the Large Cap universe.”3 The small cap European companies outperformed the large cap European companies in first quarter of 2006, thereby, continued their six year cycle of out-performance.4 “Market expects 21% growth in small caps, 16% in mid caps and 10% in large caps.”5 Brad (2006) argued that market capitalization-based indexes signify the clearest explanation of the market opportunity set.6 According to Integrity Research Associates (2007), during the last five years, the small cap companies have outperformed large cap companies and the assets of these companies have grown from $86 billion in 2005 to $102 billion in 2007.7 “Today, there is a growing demand for managers with a broader small/mid cap, or “SMID” cap mandate to manage the non-large cap equity portion of a portfolio.”8The mid cap companies outperform the large cap companies because mid cap stocks are flexible, innovative, capitalised, globally diversified and high growth aspects.9 In order to evaluate the impact of the market cap on the performance of the companies, Ibbotson Associates conducted a study, which showed that 94 percent of the 20-year periods from 1976 to 1995, the smallest cap companies performed better as compared to the large cap companies.10Roxy Capital Management, LLC also conducted a research to measure the performance of different market cap companies and it has found that over the past 25 years, mid-caps have offered more returns as compared to any other equity asset class especially while comparing it with the small cap stocks.11 As measured by Russell 2000, for the ten years ended June 30, 1999, large-cap companies, as calculated by the S&P 500, returned an average of 18.78% per year. On the other hand, the mid-cap stocks, as measured by the S&P 400, returned an average of 17.87% per year during the same period. While small-cap stocks had the average annual returns of 12.39% for the same time period.12 Methodology This research follows Fisher (1966), Fisher & Lorie (1968, 1970, and 1977) and Ibbotson & Sinquefield (1976) studies conducted on the evaluation of impact of market cap on the returns of the companies. Research Paradigm: The population for this study is defined as top 300 companies based on their market cap listed on three stock exchanges of BSE, ASX and LSE. The sample size for this research study will consist of top 160 companies (60 from each stock exchange). The 60 companies out of 100 from each stock exchange will be selected based on their relative market caps. Suppose, out of top 100 companies of BSE-100, the first 20 will be considered as large-cap companies. After a gap of 20 companies, the next 20 will be mid-cap companies and again with a gap of 20 companies, the last 20 will be low-cap companies. Data Collection: The data for conducting the analysis will be collected for the last five years. Moreover, the data will be collected only from the reliable resources such as websites of stock exchanges (BSE, ASX, and LSE). For measuring market performance of companies, information like stock prices, outstanding shares, market capitalization will be gathered. The 100-Index of all these three stock exchanges (ASX-100, BSE-100 and FTSE-100) will be taken. The last five years data from 1st July 2004 to 31st August 2009, for large, mid and small market caps will be collected. Data Analysis: Both the qualitative and quantitative methodologies such as content analysis will be used to investigate the research questions. The thematic analysis and grounded theory methodologies will not be used in this research study. The content analysis will be done, in which the secondary research findings of different research papers; websites etc. will be also used. The data will be analysed in three steps. First, correlation and regression analysis will be conducted to identify the existence of any significant trend/relation or impact of Market Capitalisation on Market Performance. The dependent variable will be return and turnover, whereas the independent variable will be market capitalisation. Second, the graphical representation will be used to evaluate the returns of the companies over the last five years. Third, the return per unit of risk will be calculated for all companies listed on three stock exchanges. Based on these findings, the null hypotheses or alternate hypotheses will be approved or disapproved. Bibliography Casey, Quirk & Associates, 2006. Small Cap Spillovers. [Online] Available at: http://www.caseyquirk.com/docs/research_insight/06.03_RI_SmallCap.pdf. [Accessed 9 November 2009] Dimson, Elroy and Marsh, Paul, (2001). U.K. Financial Market Returns, 1995-2000. Journal of Business, 74 (n.d.). Fisher, L. 1966. Some new stock-market indices. Journal of Business 39:91–225. Fisher, L., and Lorie, J. H. 1968. Rates of return on investments in common stock: The year-by-year record, 1926–65. Journal of Business 41:291–316. Fisher, L., and Lorie, J. H. 1970. Some studies of variability of returns of investments in common stocks. Journal of Business 43:99–134. Fisher, L., and Lorie, J. H. 1977. A Half Century of Returns on Stocks and Bonds: Rates of Return on Investments in Common Stocks and US Treasuries. Chicago: University of Chicago, Graduate School of Business. Goldman Sachs Asset Management, 2008. Small/Mid Cap Investing: Thinking Outside the Small Cap Box. [Online] Available at: http://www2.goldmansachs.com/gsam/docs/instgeneral/general_materials/perspectives/thinking_outside_the_small_cap_box.pdf . [Accessed 9 November 2009] Ibbotson Associates. 2000. Stocks, Bonds, Bills, and Inflation: 1999 Yearbook. Chicago: Ibbotson Associates. Ibbotson, R. G., and Sinquefield, R. A. 1976. Stocks, bonds, bills and inflation: Year-by year historical returns (1926–1974). Journal of Business 49, no. 1:11–47. IMS Capital Management Inc., (n.d.). The Value of Mid Cap Stock Investing. [Online] Available at: http://www.imscapital.com/docs/midcapstocksoctober08approved.pdf. [Accessed 9 November 2009] Integrity Research Associates, 2007. US Small Cap Research. [Online] Available at: http://www.integrity-research.com/cms/our-services/researchfocus/small-caps/. [Accessed 9 November 2009] Investments and Pensions Europe, 2007. Investing in European Small And Midcaps. [Online] Available at: http://www.munroscapital.com/12_07_Investments_and_Pensions.pdf. [Accessed 9 November 2009] Kimelman, John, 2006. Ibbotson: Small Caps Still Have Big Bang. [Online] Available at: http://www.beearly.com/pdfFiles/Ibbotson1322006.pdf. [Accessed 9 November 2009]. McCarron, Mark, 2006. European Small/Mid Cap: Can the Good Times Last. [Online] Available at: http://www.globalpensions.com. [Accessed 9 November 2009] OppenheimerFunds, 2009. Market Capitalization 101. [Online] Available at: https://www.oppenheimerfunds.com/digitalAssets/64cc56623a910210VgnVCM100000e82311ac____-0.pdf. [Accessed 9 November 2009]. Pope, Brad, 2006. Insights of Market Capitalization and Fundamental-Weighted Indexes. [Online] Available at: http://ca.ishares.com/publish/content/related_documents/downloads/white_paper/MarketCap_EN.pdf. [Accessed 9 November 2009] Roxbury Capital Management, 2005. The Case for Midcap Stocks in Today’s Volatile Market. [Online] Available at: http://www.roxcap.com/PDF%20Files/White%20Papers/Mid_Cap_Stocks_The_Case_for_06032005.pdf. [Accessed 9 November 2009]. Smart, Cathy, 1996. Small and Midcap Stock: Bigger Isn’t Always Better. [Online] Available at: http://www.infoplease.com/finance/tips/money/moneyman_110899.html. [Accessed 9 November 2009]. Read More