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The Other Side of Value: Good Growth and the Gross Profitability Premium


  • Robert Novy-Marx


Profitability, 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.

Suggested Citation

  • Robert Novy-Marx, 2010. "The Other Side of Value: Good Growth and the Gross Profitability Premium," NBER Working Papers 15940, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:15940
    Note: AP

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    References listed on IDEAS

    1. Berk, Jonathan B, 1995. "A Critique of Size-Related Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 8(2), pages 275-286.
    2. repec:hrv:faseco:30721347 is not listed on IDEAS
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    Cited by:

    1. Beneish, M.D. & Lee, C.M.C. & Nichols, D.C., 2015. "In short supply: Short-sellers and stock returns," Journal of Accounting and Economics, Elsevier, vol. 60(2), pages 33-57.
    2. Stambaugh, Robert F. & Yu, Jianfeng & Yuan, Yu, 2012. "The short of it: Investor sentiment and anomalies," Journal of Financial Economics, Elsevier, vol. 104(2), pages 288-302.
    3. repec:eee:finmar:v:33:y:2017:i:c:p:75-101 is not listed on IDEAS
    4. Olivier Ledoit & Michael Wolf & Zhao Zhao, 2016. "Efficient weighting: a more powerful test for cross-sectional anomalies," ECON - Working Papers 238, Department of Economics - University of Zurich, revised Feb 2018.
    5. 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.

    More about this item

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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