The Value of Growth: Changes in Profitability and Future Stock Returns

49 Pages Posted: 10 Aug 2016 Last revised: 19 Aug 2020

See all articles by Chelsea Yaqiong Yao

Chelsea Yaqiong Yao

Lancaster University - Management School; New York University (NYU) - Leonard N. Stern School of Business

Bryan Lim

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Juan M. Sotes-Paladino

Universidad de los Andes, Chile; University of Melbourne - Department of Finance

George Jiaguo Wang

Lancaster University Management School; New York University - Stern School of Business

Date Written: August 10, 2020

Abstract

We provide a novel framework and empirical results to understand the relation between profitability growth and returns. By connecting a concave profit function to a standard valuation framework, we argue that if growth-rate risk carries a positive risk premium, firms with higher current profitability growth should earn higher average returns but this effect should decrease with firm scale. Across a range of empirical tests, we find strong evidence in support of our hypotheses. Moreover, the predictive effects of profitability growth and its interaction with scale are not subsumed after controlling for an array of associated, potentially confounding variables.

Keywords: Profitability; Growth; Return Predictability; Stock Returns

JEL Classification: G11; G12

Suggested Citation

Yao, Yaqiong and Lim, Bryan and Sotes-Paladino, Juan M. and Wang, George Jiaguo, The Value of Growth: Changes in Profitability and Future Stock Returns (August 10, 2020). 29th Australasian Finance and Banking Conference 2016, Asian Finance Association (AsianFA) 2018 Conference, Available at SSRN: https://ssrn.com/abstract=2819183 or http://dx.doi.org/10.2139/ssrn.2819183

Yaqiong Yao (Contact Author)

Lancaster University - Management School ( email )

Department of Accounting and Finance
Lancaster University Management School
Lancaster, LA1 4YX
United Kingdom

New York University (NYU) - Leonard N. Stern School of Business ( email )

Stern School of Business
44 West 4th Street
New York, NY NY 10012
United States

Bryan Lim

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Juan M. Sotes-Paladino

Universidad de los Andes, Chile ( email )

Chile

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia
+61 3 9035 9827 (Phone)
+61 3834 6914 (Fax)

George Jiaguo Wang

Lancaster University Management School ( email )

Department of Accounting and Finance
Lancaster University Management School
Lancaster, Lancashire LA1 4YX
United Kingdom
+44 1524 592 577 (Phone)

HOME PAGE: http://www.lancaster.ac.uk/lums/people/george-wang

New York University - Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
373
Abstract Views
2,105
rank
88,765
PlumX Metrics