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

Journal of Financial Research, 2020, 43(2), pp. 305-344. DOI: doi.org/10.1111/jfir.12208

62 Pages Posted: 30 Jan 2020 Last revised: 3 Nov 2021

See all articles by Jared DeLisle

Jared DeLisle

Utah State University

H. Zafer Yuksel

Texas A&M University Corpus Christi

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, R. 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, 2020, 43(2), pp. 305-344. DOI: doi.org/10.1111/jfir.12208, Available at SSRN: https://ssrn.com/abstract=3516263 or http://dx.doi.org/10.2139/ssrn.3516263

R. Jared DeLisle

Utah State University ( email )

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

H. Zafer Yuksel

Texas A&M University Corpus Christi ( email )

6300 ocean drive
corpus christi, TX TX 78414
United States

HOME PAGE: http://https://cob.tamucc.edu/About_Us/faculty_staff_directory.html

Gulnara R. Zaynutdinova (Contact Author)

West Virginia University, Department of Finance ( email )

John Chambers College of Business and Economics
Morgantown, WV 26506
United States

HOME PAGE: http://https://business.wvu.edu/

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