  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.
