The profitability effect: Insights from international equity markets

Abstract

Using data from 33 international markets over the period 1990–2017, we reveal that the profitability effect exists in many countries other than the USA, but the size of this effect is sensitive to the measure of profitability and portfolio sorts. The profitability effect is significant in pooled developed and global markets, though less so in emerging markets. The evidence lends support to incorporating a profitability factor in regional/global factor models. Cross‐region and cross‐country analyses show mixed evidence for a positive relationship between profitability effects and market developments, though the overall findings lean toward supporting the prediction of the investment model.

Empirical evidence of profitability anomaly in the Thai stock market

“…Adding cash-based profitability to popular investment styles including market, size, value, and momentum improves Shape ratios of such style-sorted portfolios. Chen et al (2018) conclude that the profitability effect exists in developed markets but not in the emerging markets, which is consistent with the investment CAPM (Zhang, 2017) but contradictory to the behavioral finance theory.…”

“…Gross profitability (Novy-Marx, 2013), operating profitability French, 2015, Ball et al, 2015), and cash flow-to-price (C/P) (Lakonishok et al, 1994) are examined. Some scholars such as Chen et al (2018) question the existence of profitability anomalies in the emerging market. The analysis of the cross-sectional returns of individual firms by Fama-Macbeth (1973) regression and the portfolio performance by Carhart (1997) fourfactor model confirm that gross profitability and C/P are significant indicators for future returns, but not operating profitability.…”

“…Institutional investors demand quality stocks that have high gross profitability. While Novy-Marx (2013) shows that gross profitability is able to price the excess returns based on an investment strategy sorted by Return on Equity (ROE) in the US market, Chen et al (2018) finds that Hou et al's (2015) ROE strategy is stronger than gross profitability in the 33 international markets. Ball et al (2015) argue that operating profitability is the better measurement than gross profitability to forecast expected returns.…”

Gross Profitability and 52-Week High Price

“…The findings revealed the trend in profitability, and its predictive information on future returns. Chen et al (2018) checked the existence of profitability premium in 33 international markets outside of the US. The authors employed varies of profitability measures in analysis, and concluded the profitability effect was significant, and pervasive both developed and emerging markets.…”

Firm Attributes, Corporate Fundamentals and Investment Strategies: An Empirical Study for Indian Stock Market

“…Profitability anomaly suggests that profitable firms give higher returns than unprofitable firms. This has been tested by various studies (see Artmann et al, 2011; Chen et al, 2018; Cohen et al, 2002; Fama & French, 2008; Hanauer & Lauterbach, 2019; Haugen & Baker, 1996; Leite et al, 2018; Novy-Marx, 2013; Subramaniam et al, 2017; Wahal, 2019).…”