Home > Research > Publications & Outputs > The Value of Growth: Changes in Profitability a...

Electronic data

Links

Text available via DOI:

View graph of relations

The Value of Growth: Changes in Profitability and Future Stock Returns

Research output: Contribution to Journal/MagazineJournal articlepeer-review

Published
Close
Article number107036
<mark>Journal publication date</mark>1/01/2024
<mark>Journal</mark>Journal of Banking and Finance
Volume158
Number of pages52
Publication StatusPublished
Early online date8/11/23
<mark>Original language</mark>English

Abstract

We use a simple two-stage dividend growth model to connect profitability growth and firm scale to stock returns. In this framework, both the magnitude and the length of the first-stage growth play a key role in determining returns. Using current profitability growth to estimate magnitude and firm scale as inverse proxy for length, we predict that future returns should increase with current profitability growth but, crucially, the effect should diminish with firm scale. Across a range of empirical tests, we find strong evidence in support of our model determinants and predictions. Our findings are not explained by an array of associated, potentially confounding variables.