IDEAS home Printed from https://ideas.repec.org/a/bla/jfinan/v78y2023i6p3387-3422.html

Operating Hedge and Gross Profitability Premium

Author

Listed:
  • LEONID KOGAN
  • JUN LI
  • HAROLD H. ZHANG

Abstract

We show theoretically that variable production costs reduce systematic risk of firms' cash flows if capital and variable inputs are complementary in firms' production and input prices are procyclical. In our dynamic model, this operating hedge effect is weaker for more profitable firms, giving rise to a gross profitability premium. Moreover, gross profitability and value factors are distinct and negatively correlated, and their premia are not captured by the capital asset pricing model (CAPM). We estimate the model by simulated method of moments, and find that its main implications for stock returns and cash flow dynamics are quantitatively consistent with the data.

Suggested Citation

  • Leonid Kogan & Jun Li & Harold H. Zhang, 2023. "Operating Hedge and Gross Profitability Premium," Journal of Finance, American Finance Association, vol. 78(6), pages 3387-3422, December.
    • Handle: RePEc:bla:jfinan:v:78:y:2023:i:6:p:3387-3422
    DOI: 10.1111/jofi.13275
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jofi.13275
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jofi.13275?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Erica X. N. Li & Guoliang Ma & Shujing Wang & Cindy Yu, 2026. "Fundamental Anomalies," Management Science, INFORMS, vol. 72(2), pages 1636-1657, February.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jfinan:v:78:y:2023:i:6:p:3387-3422. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/afaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.