The Other Side of Value: Good Growth and the Gross Profitability Premium
AbstractProfitability, as 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 average returns than unprofitable firms, despite having, on average, lower book-to-markets and higher market capitalizations. 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 cashflow durations, and have lower levels of operating leverage, than unprofitable firms. Controlling for gross profitability explains most earnings related anomalies, as well as a wide range of seemingly unrelated profitable trading strategies.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15940.
Date of creation: Apr 2010
Date of revision:
Publication status: published as Novy - Marx, Robert, “The Other Side of Value: The Gross Profitability Premium , ” Journal of Financial Economics, 108(1) , 1 - 28, 2013.
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Find related papers by JEL classification:
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-05-08 (All new papers)
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- Chung, San-Lin & Hung, Chi-Hsiou & Yeh, Chung-Ying, 2012. "When does investor sentiment predict stock returns?," Journal of Empirical Finance, Elsevier, vol. 19(2), pages 217-240.
- Robert F. Stambaugh & Jianfeng Yu & Yu Yuan, 2011.
"The Short of It: Investor Sentiment and Anomalies,"
NBER Working Papers
16898, National Bureau of Economic Research, Inc.
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