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Profitability Premium in Indonesia Stock Market

Author

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  • Dr. Yanuar Dananjaya

    (BSc., MM, Universitas Pelita Harapan, Surabaya.)

Abstract

This paper examines the effect of profitability to stock return. Efficient Market Hypothesis predicts that no publicly available information can be used to predict stock return. However, several papers show that profitability, both gross and net, is positively correlated with stock return. This phenomenon is known as profitability premium and explained as the result of either risk premium or mispricing. Some papers also find that gross profitability is better predictor of future abnormal return compared to net profitability. MWe examine profitability premium in Indonesia stock market. Both gross and net profitability are used, and the result is compared to determine which one correlate more with stock return. It is shown that while gross profitability is positively related to future stock return, net profitability has no relation to future stock return. Interestingly, sales to asset ratio shows stronger relation to future stock return compared to gross profitability. The result will be important for stock investor in Indonesia as another tool that can be used in investing strategy.

Suggested Citation

  • Dr. Yanuar Dananjaya, 2023. "Profitability Premium in Indonesia Stock Market," International Journal of Science and Business, IJSAB International, vol. 18(1), pages 73-79.
    • Handle: RePEc:aif:journl:v:18:y:2023:i:1:p:73-79
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    References listed on IDEAS

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