Abstract
This paper investigates whether profitability skewness is related to expected stock return. We document significant evidence that profitability skewness positively predicts cross-sectional stock returns, opposite to the negative relation between return skewness and stock returns. The positive return predictability is robust to alternative proxies of profitability and holds up to a year. The results cannot be explained by existing risk factors and return predictors including the level of profitability and return skewness. In addition to a behavioral explanation, the evidence is consistent with explanations in which profitability skewness is positively related to firm growth opportunity and future profitability.
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