TY  - JOUR
AU  - Novy-Marx,Robert
TI  - The Other Side of Value: Good Growth and the Gross Profitability Premium
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15940
PY  - 2010
Y2  - April 2010
UR  - http://www.nber.org/papers/w15940
L1  - http://www.nber.org/papers/w15940.pdf
N1  - Author contact info:
Robert Novy-Marx
Simon Graduate School of Business
University of Rochester
305 Schlegel Hall
Rochester, NY  14627
Tel: 773/834-7123
E-Mail: Robert.Novy-Marx@Simon.Rochester.edu
AB  - 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.
ER  -