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The Cross-section of Expected Returns on Penny Stocks: Are Low-hanging Fruits Not-so Sweet?

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  • Ananjan Bhattacharyya
  • Abhijeet Chandra

Abstract

In this paper, we study the determinants of expected returns on the listed penny stocks from two perspectives. Traditionally financial economics literature has been devoted to study the macro and micro determinants of expected returns on stocks (Subrahmanyam, 2010). Very few research has been carried out on penny stocks (Liu, Rhee, & Zhang, 2011; Nofsinger & Verma, 2014). Our study is an effort to contribute more empirical evidence on penny stocks in the emerging market context. We see the return dynamics of penny stocks from corporate governance perspective. Issues such as shareholding patters are considered to be of much significance when it comes to understand the price movements. Using cross-sectional data on 167 penny stocks listed in the National Stock Exchange of India, we show that (i) Returns of portfolio of lower market-cap penny stocks are significantly different(higher) than that of higher market-cap penny stocks. (ii)Returns of portfolio lower P/E stocks are significantly different (higher) than that of higher P/E stocks. Similarly, returns of portfolio of lower P/B stocks are significantly different (higher) than that of higher P/B stocks, and returns of portfolio of lower priced penny stocks are significantly different(higher) than that of higher priced penny stocks. (iii) Trading volume differences due to alphabetism are insignificant. (iv)Differences in returns of portfolios based on beta and shareholding patterns are insignificant.

Suggested Citation

  • Ananjan Bhattacharyya & Abhijeet Chandra, 2016. "The Cross-section of Expected Returns on Penny Stocks: Are Low-hanging Fruits Not-so Sweet?," Papers 1610.01338, arXiv.org.
    • Handle: RePEc:arx:papers:1610.01338
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    References listed on IDEAS

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    1. Lieven De Moor & Piet Sercu, 2015. "The smallest stocks are not just smaller: global evidence," The European Journal of Finance, Taylor & Francis Journals, vol. 21(1), pages 51-70, January.
    2. Avanidhar Subrahmanyam, 2010. "The Cross†Section of Expected Stock Returns: What Have We Learnt from the Past Twenty†Five Years of Research?," European Financial Management, European Financial Management Association, vol. 16(1), pages 27-42, January.
    3. John R. Nofsinger & Abhishek Varma, 2014. "Pound wise and penny foolish? OTC stock investor behavior," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 6(1), pages 2-25, September.
    4. Xavier Gabaix & Parameswaran Gopikrishnan & Vasiliki Plerou & H. Eugene Stanley, 2003. "A theory of power-law distributions in financial market fluctuations," Nature, Nature, vol. 423(6937), pages 267-270, May.
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    Cited by:

    1. Kaiser, Lars, 2019. "Seasonality in cryptocurrencies," Finance Research Letters, Elsevier, vol. 31(C).

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