Comparison of Signaling the Types of Profit and Their Impacts on Excess Stock Returns

Predicting stock returns is one of the main concerns of investors, because by this means they can get higher returns at a certain level of risk. Analyzing the information content in financial statements leads to increase the investor learning and changing the signaling of profit. This change can cause investors to change their perspective in using alternative measures of net income, such as gross profit and operating profit, and affect the acquisition of excess stock returns. Therefore, the purpose of this research is to compare the signaling of net income, gross profit and operating profit and compare the effect of profit on the excess returns in companies listed in the Tehran Stock Exchange. The research hypotheses are tested by regression analysis based on panel data, the five-factor model of Fama French (2015) and using the sample data includes 135 companies Listed in Tehran Stock Exchange. The results revealed that the net income signals are higher than the operating profit. The research result also indicates the net income signals are higher than the gross profit. Another result shows that net income has a greater ability to generate excess stock returns than gross profit and operating profit.