Firm profitability: Mean-reverting or random-walk behavior?
AbstractWe analyze the stochastic properties of three measures of profitability, return on assets (ROA), return on equity (ROE), and return on investment (ROI), using a balanced panel of US firms during the period 2001–2010. We employ a panel unit-root approach, which assists in identifying competitive outcomes versus situations that require regulatory intervention to achieve more competitive outcomes. Based upon conventional panel unit-root tests, we find substantial evidence supporting mean-reversion, which, in turn, lends support to the long-standing “competitive environment” hypothesis originally set forward by Mueller (1977). These results, however, prove contaminated by the assumption of cross-section independence. After controlling for cross-section dependence, we find that profitability evolves as a non-stationary process in some sectors in the US economy. Our findings, especially taken as a whole, remain fairly robust to various assumptions regarding the underlying data generation process.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Economics and Business.
Volume (Year): 66 (2013)
Issue (Month): C ()
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Web page: http://www.elsevier.com/locate/jeconbus
Cross-section dependence; Unit roots; Panel data; Hysteresis; Firm profitability;
Other versions of this item:
- Giorgio Canarella & Stephen M. Miller & Mahmoud M. Nourayi, 2012. "Firm Profitability: Mean-Reverting or Random-Walk Behavior?," Working Papers 1202, University of Nevada, Las Vegas , Department of Economics.
- Giorgio Canarella & Stephen M. Miller & Mahmoud M. Nourayi, 2012. "Firm Profitability: Mean-Reverting or Random-Walk Behavior?," Working papers 2012-05, University of Connecticut, Department of Economics, revised Oct 2012.
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Longitudinal Data; Spatial Time Series
- D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
- L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
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