Mohanty (2002) documents the evidence of size effect in India. In the sample period, it is found that the small firms have generated an annual excess return of 70% over the large firms. There can be two possible interpretations of the above findings. Size may be a proxy for some unexplained risk factor. The market may also be inefficient. Using the Fama and French (1993) multi-factor model, it is found that size indeed is a proxy for risk. However, the high excess return generated by the small firms is simply too high and it cannot be explained by their factor risk loadings. Using the method adopted by Lakonishok, Shleifer, and Vishny (1994), the hypothesis that the market is inefficient could not be rejected.
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