The Profitability and Investment Premium: Pre-1963 Evidence
36 Pages Posted: 31 Dec 2016 Last revised: 26 Sep 2017
Date Written: September 26, 2017
I investigate the profitability and investment premium in stock returns using hand-collected data from Moody’s Manuals for 1940-1963. Controlling for value, the profitability premium emerges as important in this period. In contrast, there no reliable relation between investment and returns, regardless of whether investment is measured using growth in total assets or book equity, and even after extending the data back to 1926. In spanning regressions, factors constructed from profitability and book-to-market ratios (RMW and HML respectively) improve the mean-variance efficient tangency portfolio but the investment factor (CMA) does not.
Keywords: Profitability, Investment, Value Premium, Factor Models, Asset Pricing
JEL Classification: G12
Suggested Citation: Suggested Citation