Accepted author manuscript, 449 KB, PDF document
Available under license: CC BY: Creative Commons Attribution 4.0 International License
Final published version
Licence: CC BY: Creative Commons Attribution 4.0 International License
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - The Value of Growth
T2 - Changes in Profitability and Future Stock Returns
AU - Wang, George
AU - Yao, Chelsea
AU - Sotes-Paladino, Juan
AU - Lim, Bryan
PY - 2024/1/1
Y1 - 2024/1/1
N2 - 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.
AB - 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.
KW - Firm size
KW - Profitability growth
KW - Stock returns
U2 - 10.1016/j.jbankfin.2023.107036
DO - 10.1016/j.jbankfin.2023.107036
M3 - Journal article
VL - 158
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
SN - 0378-4266
M1 - 107036
ER -