The value of growth: Changes in profitability and future stock returns

Bryan Lim, Juan Sotes-Paladino, George Jiaguo Wang and Yaqiong Yao

Journal of Banking & Finance, 2024, vol. 158, issue C

Abstract: We use a simple two-stage dividend growth model to connect profitability growth and firm scale to stock returns. In this framework, both the magnitude and the length of the first-stage growth play a key role in determining returns. Using current profitability growth to estimate magnitude and firm scale as inverse proxy for length, we predict that future returns should increase with current profitability growth but, crucially, the effect should diminish with firm scale. Across a range of empirical tests, we find strong evidence in support of our model determinants and predictions. Our findings are not explained by an array of associated, potentially confounding variables.

Keywords: Profitability growth; Firm size; Stock returns (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2024
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:158:y:2024:i:c:s0378426623002273

DOI: 10.1016/j.jbankfin.2023.107036

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