Capturing Profitability in Asset Pricing Models for Japanese Equities 1994-2016

Dong Liu and Hiroshi Yadohisa

International Journal of Economics and Finance, 2018, vol. 10, issue 5, 254-260

Abstract: We follow Ball et al. (2015) to investigate and compare firms¡¯ gross profit, operating profit, and net income as predictors of returns for a cross-section of traded Japanese equities spanning 1994-2016. We test the predictive power of profit measures on cross-sectional stock returns using portfolio tests and Fama-MacBeth regressions, find that gross-profit-to-book-equity significantly predict returns on sampled stocks. Consistent with Novy-Marx (2013), we also find that sorting portfolios by gross profitability and book-to-market ratios outperform in the Japanese market. Hence, we create a Market-Profitability-Value model that captures value and profitability premium among returns of sampled stocks. Based on Gibbons-Ross-Shanken test and economic value, we demonstrate that our enhanced model outperforms Fama¨CFrench multiple-factor model in isolating influences on equity returns.

Keywords: expected return; gross profitability; operating profitability; net income (search for similar items in EconPapers)
Date: 2018
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