The Effect of Firm Size on Stock Returns: Evidence from a Panel Nonlinear Co-integration Model for Iran Stock Market

The purpose of this paper is to introduce criteria for investors to improve their company's profitability and performance. In this regard, this study investigates the nonlinear relation hypothesis among firm size and stock returns, with respect to the firms listed on Tehran Stock Exchange during the five-year period between 2008 and 2016. Due to the importance of the relationship between risk and return, asset pricing models were always explained. Capital asset pricing model was introduced as the starting point for asset pricing models. Subsequently, other asset pricing models, including Fama model, French model, arbitrage model, etc., as the most important models were developed by adding and modifying variables. In most of the models, variable size enterprise is one of the most important determinants of returns. On the other hand, with the development of studies and changing circumstances, some factors lose their explanatory power. For example, the result of a study done by Hung, Azad & Fang(2014) showed that most of factors which were tested lost power explaining. Also, some research results show that the form of relationship between risk and returns is possible to change in some conditions. For example, the results of a study done by Apergis & Payne (2014) showed that there is a nonlinear relationship between enterprise size and returns. In this study, two models with two different statistical methods were used to test hypothesis of nonlinear relationship between enterprise size and returns. The first model uses a panel nonlinear cointegration method to confirm or reject hypothesis, and investigates positive and negative effects of enterprise size over returns. Using a panel co-integration method, the second model tests nonlinear relationship, i.e. the inverted-U cure hypothesis, between firm size and stock returns. The results of analysis of data in the first model based on a panel nonlinear cointegration model, provide evidence of asymmetric effects and nonlinear relationship between stock returns and firm size. On the other hand, the results of analysis of data in the second model based on panel data also confirm that there is a nonlinear relationship, i.e., inverted U curve, between firm size and stock returns at the company level.
According to the results mentioned, investors, shareholders and Capital market analysts are recommended to consider firm size as the most important factor to explain returns and pay attention to this issue that there is a nonlinear relationship between firm size and stock returns.