Influence of Market Capitalisation in Quality Investing: A Comparative Study of Large cap and Small cap Indian Stocks

This research proceeds to analyse the role of market capitalization in quality investing by comparing “Large Capital and Small Capital Companies” in the Indian equity markets. In addressing companies whose fundamentals present a strong balance sheet, debt levels that can be managed, and positive cash flows, quality investing has largely been associated with larger-induced stocks. Nevertheless, this research seeks to investigate some key aspects of quality investing criteria such as Return on Equity (ROE), Compounded Profit Growth and Novy-Marx Gross Profitability through a comparison depending on market capitalization. Over 5 years (2019-2024), using a sample of 100 companies and filtering it to 26 companies consisting of 16 large-cap and 10 small-cap from the Nifty 100 and Nifty SmallCap 100 indices, the study employs statistical tests to evaluate the differences in financial performance across these two market segments. The findings reveal that large-cap companies exhibit significantly higher ROE compared to small-cap firms, but no significant differences are observed in profit growth or gross profitability. In addition, both large and Small Capital stocks are over-valued where both the capitalisation types do not show significant difference between the degrees of overvaluation. The present study enhances the existing literature on market capitalization and quality investing as well as provides recommendations on the possible approach for the investors interested in both large and small-cap segments.