The value of growth: changes in profitability and future stock returns

Bryan Lim, Juan Sotes-Paladino, George Jiaguo Wang, Yaqiong Yao*

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Scopus citations


We use a simple two-stage dividend growth model to connect profitability growth and firm scale to stock returns. In this framework, both the magnitude and the length of the first-stage growth play a key role in determining returns. Using current profitability growth to estimate magnitude and firm scale as inverse proxy for length, we predict that future returns should increase with current profitability growth but, crucially, the effect should diminish with firm scale. Across a range of empirical tests, we find strong evidence in support of our model determinants and predictions. Our findings are not explained by an array of associated, potentially confounding variables.

Original languageEnglish
Article number107036
Pages (from-to)1-16
Number of pages16
JournalJournal of Banking and Finance
StatePublished - Jan 2024

Bibliographical note

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  • Firm size
  • Profitability growth
  • Stock returns


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