The other side of value: The gross profitability premium
Journal of Financial Economics, 2013, vol. 108, issue 1, pages 1-28
Profitability, measured by gross profits-to-assets, has roughly the same power as book-to-market predicting the cross section of average returns. Profitable firms generate significantly higher returns than unprofitable firms, despite having significantly higher valuation ratios. Controlling for profitability also dramatically increases the performance of value strategies, especially among the largest, most liquid stocks. These results are difficult to reconcile with popular explanations of the value premium, as profitable firms are less prone to distress, have longer cash flow durations, and have lower levels of operating leverage. Controlling for gross profitability explains most earnings related anomalies and a wide range of seemingly unrelated profitable trading strategies.
Keywords: Profitability; Value premium; Factor models; Asset pricing; Quality investing (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (10) Track citations by RSS feed
Downloads: (external link)
Full text for ScienceDirect subscribers only
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: http://EconPapers.repec.org/RePEc:eee:jfinec:v:108:y:2013:i:1:p:1-28
Access Statistics for this article
Journal of Financial Economics is currently edited by G. William Schwert
More articles in Journal of Financial Economics from Elsevier
Series data maintained by Zhang, Lei ().