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.

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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.

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