Abstract
Traditionally, we have assessed firm success relative to a two factor model using say size and a book-to-market ratio. However, recently Novy-Marx (2013) suggests that these measures may simple be a proxy for profitability in firms. The argument is that traditional profitability measures can be manipulated by management and thus cloud the relationship between measured profits and firm success. However, a cleaner measure of profitability better predicts performance than does size and book-to-market. Thus, the traditional empirical factors are replaced with a stronger theoretically predictive variable. Also, in that context at least for REITs, size and book-to-market lose their explanatory power.
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