Gross Profitability Premium in the Korean Stock Market and Its Implication for the Fund Distribution Industry

한국 주식시장에서 총수익성 프리미엄에 관한 분석 및 펀드 유통산업에 주는 시사점

Purpose – This paper’s aim is to investigate whether or not gross profitability explains the cross-sectional variation of the stock returns in the Korean stock market. Gross profitability is an alternative profitability measure proposed by Novy-Marx in 2013 to predict cross-sectional variation of stock returns in the US. He shows that the gross profitability adds explanatory pow-er to the Fama-French 3 factor model. Interestingly, gross profit-ability is negatively correlated with the book-to-market ratio. By confirming the gross profitability premium in the Korean stock market, we may provide some implications regarding the well-known value premium. In addition, our empirical results may provide opportunities for the fund distribution industry to promote brand new styles of funds. Research design, data, and methodology – For our empirical analysis, we collect monthly market prices of all the companies listed on the Korea Composite Stock Price Index (KOSPI) of the Korea Exchanges (KRX). Our sample period covers July1994 to December2014. The data from the company financial state-mentsare provided by the financial information company WISEfn. First, using Fama-Macbeth cross-sectional regression, we inves-tigate the relation between gross profitability and stock return performance. For robustness in analyzing the performance of the gross profitability strategy, we consider value weighted port-folio returns as well as equally weighted portfolio returns. Next, using Fama-French 3 factor models, we examine whether or not the gross profitability strategy generates excess returns when firmsize and the book-to-market ratio are controlled. Finally, we analyze the effect of firm size and the book-to-market ratio on the gross profitability strategy. Results – First, through the Fama-MacBeth cross-sectional re-gression, we show that gross profitability has almost the same explanatory power as the book-to-market ratio in explaining the cross-sectional variatio