Profitability and Investment‐Based Factor Pricing Models

25 Pages Posted: 25 Jun 2018

See all articles by Brendan Elliot

Brendan Elliot

University of Newcastle (Australia)

Paul Docherty

Monash University

Stephen Easton

University of Newcastle (Australia) - Newcastle Business School

Doowon Lee

Newcastle Business School

Multiple version iconThere are 2 versions of this paper

Date Written: June 2018

Abstract

Ex ante predictors of stock returns must exhibit explanatory power across the feasible set of investments. But empirical results of factor pricing models that incorporate firm investment and profitability cannot explain the apparently high returns of US small stocks with very high investment levels and very low profitability. Whilst these stocks comprise only a small fraction of US data sets, this is not the case across global markets. Using a data set that is concentrated with stocks that exhibit high investment despite low profitability, we demonstrate that such factor models are limited in their explanatory power over these stocks.

Keywords: Investment, Profitability, Asset pricing model, Factor model

Suggested Citation

Elliot, Brendan and Docherty, Paul and Easton, Stephen and Lee, Doowon, Profitability and Investment‐Based Factor Pricing Models (June 2018). Accounting & Finance, Vol. 58, Issue 2, pp. 397-421, 2018. Available at SSRN: https://ssrn.com/abstract=3201369 or http://dx.doi.org/10.1111/acfi.12217

Brendan Elliot (Contact Author)

University of Newcastle (Australia) ( email )

University Drive
Callaghan, NSW 2308
Australia

Paul Docherty

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Stephen Easton

University of Newcastle (Australia) - Newcastle Business School ( email )

City Campus East – 231
Newcastle-Upon-Tyne NE1 8ST, NE1 8ST
Australia

Doowon Lee

Newcastle Business School ( email )

1 University Drive
Callaghan
Newcastle, NSW
Australia
+61 2 4921 8620 (Phone)

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