The profitability premium: Macroeconomic risks or expectation errors?

Full Yet Eric Campbell Lam, Shujing Wang, K. C. John Wei

    Research output: Contribution to conferenceConference paper


    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 languageEnglish
    Number of pages40
    Publication statusPublished - Jul 2014
    EventChina International Conference in Finance, CICF 2014 = 2014中国金融国际年会 - Chengdu, China
    Duration: 10 Jul 201413 Jul 2014


    ConferenceChina International Conference in Finance, CICF 2014 = 2014中国金融国际年会
    Internet address

    User-Defined Keywords

    • Profitability premium
    • Macroeconomic Risks
    • Expectation errors
    • Investor sentiment


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