Firm profitability and expected stock returns: Evidence from Latin America |
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Affiliation: | 1. CESA Business School, Cll 35 No. 5A-31, Bogota, Colombia;2. Universidad de los Andes, Calle 21 # 1–20 Ed. SD, Bogota, Colombia;3. ESAN University, Alonso de Molina 1652, Monterrico, Surco, Lima, Peru |
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Abstract: | Despite their higher valuation ratios, larger size, and higher investment needs, profitable firms outperform, in both raw and risk-adjusted returns, unprofitable firms in Latin America. The positive effect of firm profitability on stock returns is pervasive in univariate and bivariate sorts, panel regressions, across sub-regional markets, and among small and large stocks. A five-factor model that includes market, size, distress, profitability, and investment factors prices profitability portfolios better than other popular factor models. Five-factor alphas of profitability portfolios tend to be lower and less statistically significant, both individually and collectively, than alphas from other three widely-used pricing models. |
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Keywords: | Operating profitability Cross-sectional returns Five-factor model Emerging markets |
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