Disagregating Accounting Profitability. The Empirical Relationship Between Operating Profitability and Contemporaneous Stocks Return.

This paper studies the empirical relation between the cross-section of stock return and operating profitability that is derived explicitly from operating activities. To account only for profit from operating activities, I use financial statement reformulation and decompose profitability items into operating and financing profitability. Using Fama-MacBeth regression and univariate portfolio analysis, I find no significant evidence to suggest that operating profitability significantly predicts the cross-section of stock returns. Evidence indicates that operating profitability provides weaker predictive power of stock returns and is less robust common risk factors compared to profitability factors used in existing asset pricing literature.