Are Size And Book-To-Market Effects, Risk Compensations? Evidence from the Tunisian Stock Exchange
Nejla Bergaoui

Abstract
The bulk of existing research on the relation of size and book-to-market equity (BE/ME) effects with financial distress risk relates to United States and other developed capital markets. Little, if any, has been published on the robustness of risk-based explanation of size and BE/ME effects in emerging and little markets such as the Tunisian stock market. This paper, firstly, updates earlier investigation on the relation of stock returns with size and BE/ME ratio for equities listed in the Tunisian socks ‘market. The evidence we find support the presence of stronger and more pronounced Size and BE/ME effects in the Tunisian stocks ‘market over the period from July 1998 to December 2010.Secondly, this study examines whether size and BE/ME are related to some market and accounting based measures of financial distress risk. Consistent with the risk-based explanation, our results give evidence that Tunisian value stocks and small stocks are riskier because they are usually firms under distress. They have persistent poor performance, higher financial leverage and face substantially uncertainty in future earnings. Results of our study provide out-of sample evidence (outside US and other developed markets) on the robustness of risk-based explanation of the most puzzling anomalies: BE/ME and size effects.

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