Constructing a Powerful Profitability Factor: International Evidence

56 Pages Posted: 28 Aug 2018 Last revised: 3 Oct 2018

See all articles by Matthias X. Hanauer

Matthias X. Hanauer

Robeco Asset Management - Quantitative Strategies; Technische Universität München (TUM)

Daniel Huber

Technische Universität München (TUM)

Date Written: September 25, 2018

Abstract

Recent findings for the U.S. stock market indicate that cash-based profitability measures (i.e., profitability measures that exclude accounting accruals) outperform measures of profitability that include accruals. We demonstrate that this result also holds for international markets. In a comparison of different profitability definitions, we find that a factor based on cash-based gross profitability (gross profitability adjusted for accounting accruals) subsumes other popular profitability factors based on time-series, factor-spanning, and cross-sectional asset pricing tests. We therefore propose that a profitability factor based on cash-based gross profitability should be used in international factor models.

Keywords: Factor models, Profitability, International Markets, Anomalies

JEL Classification: G11, G12, G15

Suggested Citation

Hanauer, Matthias Xaver and Huber, Daniel, Constructing a Powerful Profitability Factor: International Evidence (September 25, 2018). Available at SSRN: https://ssrn.com/abstract=3234436 or http://dx.doi.org/10.2139/ssrn.3234436

Matthias Xaver Hanauer

Robeco Asset Management - Quantitative Strategies ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

HOME PAGE: http://www.robeco.com/en/insights/authors/matthias-hanauer.html

Technische Universität München (TUM) ( email )

Arcisstr. 21
Munich, D-80290
Germany

HOME PAGE: http://www.fm.wi.tum.de/?id=31

Daniel Huber (Contact Author)

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, 80333
Germany

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