Firm profitability and expected stock returns: Evidence from Latin America

Luis Berggrun, Emilio Cardona and Edmundo Lizarzaburu ()

Research in International Business and Finance, 2020, vol. 51, issue C

Abstract: Despite their higher valuation ratios, larger size, and higher investment needs, profitable firms outperform, in both raw and risk-adjusted returns, unprofitable firms in Latin America. The positive effect of firm profitability on stock returns is pervasive in univariate and bivariate sorts, panel regressions, across sub-regional markets, and among small and large stocks. A five-factor model that includes market, size, distress, profitability, and investment factors prices profitability portfolios better than other popular factor models. Five-factor alphas of profitability portfolios tend to be lower and less statistically significant, both individually and collectively, than alphas from other three widely-used pricing models.

Keywords: Operating profitability; Cross-sectional returns; Five-factor model; Emerging markets (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:51:y:2020:i:c:s0275531919305513

DOI: 10.1016/j.ribaf.2019.101119

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