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Alternative profitability measures and cross-section of expected stock returns: international evidence

Author

Listed:
  • Nusret Cakici

    (Fordham University)

  • Sris Chatterjee

    (Fordham University)

  • Yi Tang

    (Fordham University)

  • Lin Tong

    (Fordham University)

Abstract

This paper provides an extensive international analysis of the cross-sectional return predictive power of a variety of firm-level profitability measures, calculated from different combinations of measures of earnings and scaling variables. We show that this cross-sectional predictive relation is more pronounced when profit is measured by gross profit and when profits are scaled by enterprise value or market value of equity. Our findings support the hypotheses that the predictive power of “profits-to-market price” factor is partly attributable to stock mispricing arising from systematic behavioral biases and partly to the choice of a “clean” measure of earnings.

Suggested Citation

  • Nusret Cakici & Sris Chatterjee & Yi Tang & Lin Tong, 2021. "Alternative profitability measures and cross-section of expected stock returns: international evidence," Review of Quantitative Finance and Accounting, Springer, vol. 56(1), pages 369-391, January.
    • Handle: RePEc:kap:rqfnac:v:56:y:2021:i:1:d:10.1007_s11156-020-00897-7
    DOI: 10.1007/s11156-020-00897-7
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    More about this item

    Keywords

    International asset pricing; Profitability; Enterprise value; Behavioral finance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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