Revisiting the Profitability Premium in the Korean Stock Market

Prior studies provide mixed evidence as to whether the association between current profitability and future stock returns, namely profitability premium, exists in the Korean stock market. This study revisits this issue by employing various measures of profitability proposed by prior literature. Using twelve profitability measures including annual and quarterly measures, we find that the profitability premium consistently exists across all profitability measures in the Korean market, despite differences in its magnitude and significance depending on the definition of profitability. Notably, quarterly profitability measures show stronger relations with future returns than annual profitability measures, highlighting the importance of using more timely information to capture the predictive ability of current profitability. In addition, we find that the profitability premium is higher for firms with larger information asymmetry, consistent with a view that firms' information environment is an important factor affecting market anomalies.