What’s in a Name? A Cautionary Tale of Profitability Anomalies and Limits to Arbitrage

Journal of Financial Research, Forthcoming

58 Pages Posted: 30 Jan 2020 Last revised: 5 Mar 2020

See all articles by Jared DeLisle

Jared DeLisle

Utah State University

H. Zafer Yuksel

University of Massachusetts

Gulnara R. Zaynutdinova, Ph.D.

West Virginia University, Department of Finance

Date Written: January 8, 2020

Abstract

Recent literature investigating profitability anomalies defines profitability in various ways (i.e. gross, operating, and cash-based). We show that limits to arbitrage are associated with returns of gross and cash-based operating profitability anomalies, suggesting mispricing. In contrast, returns from the operating profitability strategy have no relation with barriers to arbitrage and exhibit no evidence of mispricing. Additionally, we show that the differential effects of limited arbitrage-related mispricing of gross and cash-based operating profitability anomalies are attributable to their respective correlations with SG&A expense and accruals anomalies. Interestingly, we find SG&A return predictability, like that of accruals, is related to limits to arbitrage. These findings suggest that investors and researchers should proceed with caution when searching for return predictability by redefining profitability measures.

Keywords: gross profitability, operating profitability, cash-based operating profitability, limits to arbitrage, mispricing, SG&A expenses, accruals

JEL Classification: G11; G12; M41

Suggested Citation

DeLisle, Jared and Yuksel, H. Zafer and Zaynutdinova, Gulnara R., What’s in a Name? A Cautionary Tale of Profitability Anomalies and Limits to Arbitrage (January 8, 2020). Journal of Financial Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3516263 or http://dx.doi.org/10.2139/ssrn.3516263

Jared DeLisle

Utah State University ( email )

Logan, UT 84322
United States
435-797-0885 (Phone)

H. Zafer Yuksel

University of Massachusetts ( email )

100 Morrissey Blvd.
M-5-257
Boston, MA Boston 02125
United States
6172877671 (Phone)

HOME PAGE: http://www.zafer.yuksel.com

Gulnara R. Zaynutdinova (Contact Author)

West Virginia University, Department of Finance ( email )

Morgantown, WV 26506
United States

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