Abstract
Macroeconomic risks only partially capture the relation between profitability and future stock returns, while an investor sentiment factor explains a substantial amount of the profitability premium. More importantly, the profitability premium concentrates in firms whose market valuations are inconsistent with their profitability and therefore more subject to ex-ante expectation errors. We provide further evidence that firms with high profitability but low market valuation have significantly higher abnormal earnings announcement returns, analyst earnings forecast errors and forecast revisions than firms with low profitability but high market valuation. Moreover, the profitability premium only exists during high sentiment periods for firms with ex-ante expectation errors. Our results suggest that mispricing due to errors in expectation plays an important role in explaining the profitability premium.
| Original language | English |
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| Number of pages | 40 |
| Publication status | Published - Jul 2014 |
| Event | China International Conference in Finance, CICF 2014 = 2014中国金融国际年会 - Chengdu, China Duration: 10 Jul 2014 → 13 Jul 2014 https://editorialexpress.com/conference/CICF2014/program/CICF2014.html |
Conference
| Conference | China International Conference in Finance, CICF 2014 = 2014中国金融国际年会 |
|---|---|
| Country/Territory | China |
| City | Chengdu |
| Period | 10/07/14 → 13/07/14 |
| Internet address |
User-Defined Keywords
- Profitability premium
- Macroeconomic Risks
- Expectation errors
- Investor sentiment