The profitability effect: Insights from international equity markets

Using data from 33 international markets over the period 1990–2017, we reveal that the profitability effect exists in many countries other than the USA, but the size of this effect is sensitive to the measure of profitability and portfolio sorts. The profitability effect is significant in pooled developed and global markets, though less so in emerging markets. The evidence lends support to incorporating a profitability factor in regional/global factor models. Cross‐region and cross‐country analyses show mixed evidence for a positive relationship between profitability effects and market developments, though the overall findings lean toward supporting the prediction of the investment model.