The profitability premium in the Brazilian capital market

Abstract

The present study assesses the impact of different profitability measures, in the Brazilian context, on predicting the cross-section of average returns and generating excess returns when constructing portfolios. Regression analyses following the methodology proposed by Fama and MacBeth (1973) with quarterly data from 2005 to 2023 were conducted, along with portfolio construction, annually rebalanced, and grouped by profitability or by size and profitability. We identified the relevance of free cash flow and operating profit, more suitable for the Brazilian market, and observed the absence of size effect and short-term momentum. This study contributes to understanding the relationship between profitability and future returns in the Brazilian capital market and in similarly sized markets, highlighting the importance of adapting international methodologies.