Abstract
Recent findings for the U.S. stock market indicate that cash-based profitability measures (i.e., profitability measures that exclude accounting accruals) outperform measures of profitability that include accruals. We demonstrate that this result also holds for international markets. In a comparison of different profitability definitions, we find that a factor based on cash-based gross profitability (gross profitability adjusted for accounting accruals) subsumes other popular profitability factors based on time-series, factor-spanning, and cross-sectional asset pricing tests. We therefore propose that a profitability factor based on cash-based gross profitability should be used in international factor models.
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