Mispricing and Profitability Premium in the U.S. Stock Market

This paper examines the effect of profitability premium in the U.S. stock market through a variety of profitability measures. The empirical results show that there is a positive profitability premium, which comes mainly from short legs rather than long legs. Firms with high profitability generate significantly higher future stock returns than those with low profitability, and the profitability premium is particularly prominent among firms with large capitalization and high growth. The profitability strategy tends to be a growth strategy for a large stock, and behavioral mispricing fails to explain the phenomenon of the profitability premium in the U.S. stock market.