Two firms can be equally profitable today and have opposite futures. The market prices the level and ignores the slope.
Gross profitability — the standard workhorse — asks how profitable a firm is. Off the same eight quarters of data the authors ask a second question: which way is it heading? Fit the quarterly series to a time trend and keep the coefficient instead of the mean. Two firms with identical average profitability land at opposite ends of the book.
The trend-sorted spread earned about 0.83% a month gross over the sample, and survives controls for the level of profitability and for earnings momentum. The size split matters before anyone gets excited: roughly 0.89% in small caps against 0.34% in large caps.
The part that argues for mispricing rather than a risk factor is not the return. It is that the profit trend predicts the next quarter's earnings surprise and a full year of analyst forecast errors — direct evidence the information had not reached the price. The transferable idea: any fundamental ratio you already compute over a rolling window has a slope signal you are throwing away.
Source paper
Akbas, F., Jiang, C., & Koch, P. D. (2017). The Trend in Firm Profitability and the Cross Section of Stock Returns. The Accounting Review, 92(5).
DOI 10.2139/ssrn.2538867 · working-paper version on SSRN
Personal reading note. Written while studying the paper — not peer reviewed, not a replication, and not a substitute for the source. Every claim above belongs to the authors; any error in restating it is mine. Follow the link. Figures here come from the abstract and secondary write-ups rather than the published tables.