The Profitability Premium in Real Estate Investment Trusts
31 Pages Posted: 8 Jan 2014
Date Written: January 1, 2014
Traditionally, we have assessed firm success relative to a two factor model using say size and a book-to-market ratio. However, recently Novy-Marx (2013) suggests that these measures may simple be a proxy for profitability in firms. The argument is that traditional profitability measures can be manipulated by management and thus cloud the relationship between measured profits and firm success. However, a cleaner measure of profitability better predicts performance than does size and book-to-market. Thus, the traditional empirical factors are replaced with a stronger theoretically predictive variable. Also, in that context at least for REITs, size and book-to-market lose their explanatory power.
Keywords: Profitability, Real Estate Investment Trusts, Return predictability, FFO, earnings
JEL Classification: G10, G11, G12
Suggested Citation: Suggested Citation