The Gross Profitability Premium: An Empirical Examination in Pakistan Stock Exchange (PSX)


  • Rita Tharwani
  • Imran Umer Chhapra
  • Sobia Shakeel
  • Salman Sarwat


Gross profits, CAPM, PSX, Fama French three & five-factor


Profitability, which is estimated by the company’s gross profits to assets i.e. Revenue (R) less cost of good-sold (COGS) has approximately the same power as a book to market (B/M) in forecasting the stock’s average return in ‘cross-section’. Profitable companies engender significantly greater average returns as compared to unprofitable companies, even with the greater valuation ratios of the company. Thus, this study endeavors to explore either the gross profitability anomaly exists in the ‘Pakistan Stock Exchange (PSX)’ and examined through famous asset pricing models i.e. CAPM, FF (three-factor & five-factor) model in the (PSX). Data set of listed-delisted companies are gathered from the period (2000-2018) through “Thomson Reuters Data Stream” and (PSX). Decile portfolios of the companies are constructed for analysis of timeseries techniques. Equally (EW) and value-weighted (VW) gross profitability based portfolios are developed to examine the robustness of the sorted portfolio. Generalized method of moments (GMM) and Wald Test are utilized. The empirical time series analysis depicts the findings with significant evidence that gross profitability anomaly exists and yields higher returns in (PSX). Therefore, it can be concluded from the results that all three asset pricing (CAPM, FF- three & five-factor) models are misspecified models in (PSX) and there are other factors such as gross
profitability for the prediction of the stocks.