NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Other Side of Value: Good Growth and the Gross Profitability Premium

Robert Novy-Marx

NBER Working Paper No. 15940
Issued in April 2010
NBER Program(s):   AP

Profitability, as measured by gross profits-to-assets, has roughly the same power as book-to-market predicting the cross-section of average returns. Profitable firms generate significantly higher average returns than unprofitable firms, despite having, on average, lower book-to-markets and higher market capitalizations. Controlling for profitability also dramatically increases the performance of value strategies, especially among the largest, most liquid stocks. These results are difficult to reconcile with popular explanations of the value premium, as profitable firms are less prone to distress, have longer cashflow durations, and have lower levels of operating leverage, than unprofitable firms. Controlling for gross profitability explains most earnings related anomalies, as well as a wide range of seemingly unrelated profitable trading strategies.

download in pdf format
   (670 K)

email paper

This paper is available as PDF (670 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w15940

Published: Novy - Marx, Robert, “The Other Side of Value: The Gross Profitability Premium , ” Journal of Financial Economics, 108(1) , 1 - 28, 2013.

Users who downloaded this paper also downloaded these:
Ross w17323 The Recovery Theorem
Wu and Zhang w15950 Does Risk Explain Anomalies? Evidence from Expected Return Estimates
Titman, Wei, and Xie w9951 Capital Investments and Stock Returns
Einav and Levin w19035 The Data Revolution and Economic Analysis
Gulen, Xing, and Zhang w15993 Value versus Growth: Time-Varying Expected Stock Returns
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us