Alternative profitability measures and cross-section of expected stock returns: international evidence

Nusret Cakici (), Sris Chatterjee (), Yi Tang () and Lin Tong ()
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Nusret Cakici: Fordham University
Sris Chatterjee: Fordham University
Yi Tang: Fordham University
Lin Tong: Fordham University

Review of Quantitative Finance and Accounting, 2021, vol. 56, issue 1, No 13, 369-391

Abstract: Abstract This paper provides an extensive international analysis of the cross-sectional return predictive power of a variety of firm-level profitability measures, calculated from different combinations of measures of earnings and scaling variables. We show that this cross-sectional predictive relation is more pronounced when profit is measured by gross profit and when profits are scaled by enterprise value or market value of equity. Our findings support the hypotheses that the predictive power of “profits-to-market price” factor is partly attributable to stock mispricing arising from systematic behavioral biases and partly to the choice of a “clean” measure of earnings.

Keywords: International asset pricing; Profitability; Enterprise value; Behavioral finance (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11156-020-00897-7

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