Abstract

Prior studies showed that the expected returns on stocks is higher for firms with high profitability than for firms with low profitability. This is called profitability premium(Novy－Marx, 2013；Ball et al., 2015；이세용, 2024). As this kind of characteristic of profitability is known, many studies tried to explain the cross section in the expected returns on stocks using profitability premium. Among them, Novy－Marx(2013) investigated the profitability premium of gross profits－to－assets() and argued that there is little relation between profitability premium and firm capitalization(). However, the empirical results showed that the magnitude of profitability premium is different over the five portfolios, which were made according to . Additionally, Novy－Marx(2013) examined profitability premium using sample where the very small firms (microcaps) are excluded because microcaps could affect the results. Ball et al.(2015) also controlled for the difference in between NYSE, Amex, and Kosdaq when separating firms into big, small, and micro firms. These results are not consistent with Novy－Marx(2013)’ argument. We investigated whether profitability premium is related to firm capitalization in South Korea’s capital market. To analyze this, we made the five portfolios G1～G5, based on . From G1 to G5, is increasing, but the magnitude of is constant, which means that G1～G5 are controlled perfectly for the effect of , although they have differents. The results are follows. Over the G1～G5 where is perfectly controlled for, profitability premium was observed more explicitly. In addition, in cases where firms are separated into some groups based on various standard of , profitability premium is explicitly observed. These results show that profitability premium is explicitly observed in South Korea when is controlled for, which is contrary to Novy－Marx(2013)’ argument. Therefore, it is expected that the quality of research on profitability premium could be increased if the effect of is appropriately controlled for.

Keywords

• Profitability premium
• firm capitalization
• size
• gross profitability
• hedge portfolio

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