The Trend in Firm Profitability and the Cross Section of Stock Returns

91 Pages Posted: 17 Dec 2014 Last revised: 7 Apr 2016

Ferhat Akbas

University of Kansas

Chao Jiang

University of South Carolina - Department of Finance

Paul D. Koch

University of Kansas - Finance Area

Date Written: November 15, 2015

Abstract

This study shows that the recent trajectory of a firm’s profits predicts future profitability and stock returns. The predictive information contained in the trend of profitability is not subsumed by the level of profitability, earnings momentum, or other well-known determinants of stock returns. The profit trend also predicts the earnings surprise one quarter later, and analyst forecast errors over the following twelve months, suggesting that sophisticated investors underreact to the information in the profit trend. On the other hand, we find no evidence of investor overreaction, and our results cannot be explained by well-known risk factors

Keywords: Gross profitability, trend in profitability, expected returns, profitability growth

JEL Classification: G12, G14

Suggested Citation

Akbas, Ferhat and Jiang, Chao and Koch, Paul D., The Trend in Firm Profitability and the Cross Section of Stock Returns (November 15, 2015). Available at SSRN: https://ssrn.com/abstract=2538867 or http://dx.doi.org/10.2139/ssrn.2538867

Ferhat Akbas

University of Kansas ( email )

1415
Lawrence, KS 66045
United States

Chao Jiang

University of South Carolina - Department of Finance ( email )

1014 Greene Street
Columbia, SC 29208
United States

Paul D. Koch (Contact Author)

University of Kansas - Finance Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

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