LAUSR

Abstract This study uses a cash-based profitability factor that is completely free from accounting accruals to test the five-factor and three other models against eight different market anomalies in Borsa Istanbul (BIST). According to the results, only beta (β) and book-to-market (B/M) effects are significant in BIST and the recently added profitability and investment factors improve neither the pricing nor the economic performances of the traditional three-factor model. Therefore, the clean surplus relationship cannot represent dividends and fail to explain common stocks’ pricing behavior in an emerging market setting. This paper provides the first evidence concerning the performance of the five-factor model which uses a profitability factor consistent with the theory underlying the model and shows that the recently added factors cannot improve the mean-variance efficiency of the three-factor model in an emerging market. The results are robust against several tests.