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Academic audit

Failedequity XS fundamental

ROA Effect within Stocks

The three-gate gauntlet · genuine only if it clears all three and survives adversarial refutation
Gate 1
Survivorship-free
free
clean panel
Eliminated here
Gate 2
Placebo ≥ P95
P54
outranked ~108 of 200 baskets
Gate 3
Cost-aware net
RF -0.63
net-negative after costs
Failed
Worst 12-month leg (RF)-0.54
−1.00 floor0
Every strategy here — winners included — loses in its worst 12 months. Depth is honest context, not the verdict.
Rejected at the luck gate — its net ranked no better than random baskets (below the P95 skill line).

This is a cross-sectional equity factor that ranks stocks by return on assets (profitability) and goes long the most profitable names against the least profitable ones. The idea, from the profitability literature, is that higher-ROA firms tend to outperform lower-ROA firms.

What we found

On our point-in-time data the long/short profitability spread showed essentially no rank-skill: the placebo percentile landed at 54, meaning the real construction was indistinguishable from random baskets of the same names. Gross alpha was near zero to begin with, and after realistic costs the leg was net negative. The risk-adjusted RF was negative and the worst year was also a loss, so there was no diversifying signal to keep. We did not carry it forward as a factor-leg.

How we tested it
2005–2026 test windowmodelled liquidity-aware costssurvivorship free
  • Data: survivorship-free 1077-name US common-stock panel, 2005-2026. Realistic modelled costs.
  • Placebo / robustness test: real result vs random baskets or shuffled signals (real vs the 95th percentile of random)
Source: Chen, Novy-Marx & Zhang (2011), "An Alternative Three-Factor Model" (ROA/profitability)
Read the paper ↗
← The Academic Audit — all 54 studies

Research, not investment advice. “Validated” factor-legs are market-neutral diversifying building blocks with a losing worst year — none is a standalone tradeable strategy. Metrics are cost-aware and modelled (not live fills); the 2005–2026 test window is out-of-sample versus the source paper. Dollar figures are not returns and are omitted by design.