Advanced Search
MyIDEAS: Login

Firm profitability: Mean-reverting or random-walk behavior?

Contents:

Author Info

  • Canarella, Giorgio
  • Miller, Stephen M.
  • Nourayi, Mahmoud M.

Abstract

We 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.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.sciencedirect.com/science/article/pii/S0148619512000689
Download Restriction: Full text for ScienceDirect subscribers only

As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.

Bibliographic Info

Article provided by Elsevier in its journal Journal of Economics and Business.

Volume (Year): 66 (2013)
Issue (Month): C ()
Pages: 76-97

as in new window
Handle: RePEc:eee:jebusi:v:66:y:2013:i:c:p:76-97

Contact details of provider:
Web page: http://www.elsevier.com/locate/jeconbus

Related research

Keywords: Cross-section dependence; Unit roots; Panel data; Hysteresis; Firm profitability;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Pesaran, M.H., 2003. "A Simple Panel Unit Root Test in the Presence of Cross Section Dependence," Cambridge Working Papers in Economics 0346, Faculty of Economics, University of Cambridge.
  2. David G. Mcmillan & Mark E. Wohar, 2011. "Profit Persistence Revisited: The Case Of The Uk," Manchester School, University of Manchester, vol. 79(3), pages 510-527, 06.
  3. Jesús Crespo Cuaresma & Adelina Gschwandtner, 2005. "Tracing the dynamics of competition: Evidence from company profits," Vienna Economics Papers 0504, University of Vienna, Department of Economics.
  4. John M. Abowd & John Haltiwanger & Ron Jarmin & Julia Lane & Paul Lengermann & Kristin McCue & Kevin McKinney & Kristin Sandusky, 2005. "The Relation among Human Capital, Productivity, and Market Value: Building Up from Micro Evidence," NBER Chapters, in: Measuring Capital in the New Economy, pages 153-204 National Bureau of Economic Research, Inc.
  5. Adelina Gschwandtner, 2012. "Evolution Of Profit Persistence In The Usa: Evidence From Three Periods," Manchester School, University of Manchester, vol. 80(2), pages 172-209, 03.
  6. Pasaran, M.H. & Im, K.S. & Shin, Y., 1995. "Testing for Unit Roots in Heterogeneous Panels," Cambridge Working Papers in Economics 9526, Faculty of Economics, University of Cambridge.
  7. Geroski, Paul A, 1998. "An Applied Econometrician's View of Large Company Performance," CEPR Discussion Papers 1862, C.E.P.R. Discussion Papers.
  8. John Haltiwanger & Julia Lane & James Spletzer, 2000. "Wages, Productivity, and the Dynamic Interaction of Businesses and Workers," NBER Working Papers 7994, National Bureau of Economic Research, Inc.
  9. B. Burcin Yurtoglu, 2004. "Persistence of firm-level profitability in Turkey," Applied Economics, Taylor & Francis Journals, vol. 36(6), pages 615-625.
  10. Adelina Gschwandtner, 2005. "Profit persistence in the 'very' long run: evidence from survivors and exiters," Applied Economics, Taylor & Francis Journals, vol. 37(7), pages 793-806.
  11. Juan Carlos Bou & Albert Satorra, 2003. "The persistence of abnormal returns at industry and firm levels," Economics Working Papers 729, Department of Economics and Business, Universitat Pompeu Fabra.
  12. Mueller,Dennis C., 2009. "Profits in the Long Run," Cambridge Books, Cambridge University Press, number 9780521101592, November.
  13. Goddard, J. A. & Wilson, J. O. S., 1999. "The persistence of profit: a new empirical interpretation," International Journal of Industrial Organization, Elsevier, vol. 17(5), pages 663-687, July.
  14. Kristian Jönsson, 2005. "Cross-sectional Dependency and Size Distortion in a Small-sample Homogeneous Panel Data Unit Root Test," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(3), pages 369-392, 06.
  15. Leon-Ledesma, Miguel & Peter McAdam, 2003. "Unemployment, Hysterisis and Transition," Royal Economic Society Annual Conference 2003 137, Royal Economic Society.
  16. Edith Madsen, 2010. "Unit root inference in panel data models where the time-series dimension is fixed: a comparison of different tests," Econometrics Journal, Royal Economic Society, vol. 13(1), pages 63-94, 02.
  17. Julia I. Lane & John C. Haltiwanger & James Spletzer, 1999. "Productivity Differences across Employers: The Roles of Employer Size, Age, and Human Capital," American Economic Review, American Economic Association, vol. 89(2), pages 94-98, May.
  18. Stephan, Andreas & Tsapin , Andriy, 2008. "Persistence and Determinants of Firm Profit in Emerging Markets," Working Paper Series in Economics and Institutions of Innovation 151, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
  19. Dechow, Patricia M. & Hutton, Amy P. & Sloan, Richard G., 1999. "An empirical assessment of the residual income valuation model1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 1-34, January.
  20. John Goddard & Hong Liu & Phil Molyneux & John O.S. Wilson, 2010. "The Persistence of Bank Profit," Working Papers 10002, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
  21. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, vol. 108(1), pages 1-24, May.
  22. Rafael E. De Hoyos & Vasilis Sarafidis, 2006. "Testing for cross-sectional dependence in panel-data models," Stata Journal, StataCorp LP, vol. 6(4), pages 482-496, December.
  23. Gordon, Robert J, 1989. "Hysteresis in History: Was There Ever a Phillips Curve?," American Economic Review, American Economic Association, vol. 79(2), pages 220-25, May.
  24. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  25. Harris, Richard D. F. & Tzavalis, Elias, 1999. "Inference for unit roots in dynamic panels where the time dimension is fixed," Journal of Econometrics, Elsevier, vol. 91(2), pages 201-226, August.
  26. Foreman, R. Dean, 2003. "A logistic analysis of bankruptcy within the US local telecommunications industry," Journal of Economics and Business, Elsevier, vol. 55(2), pages 135-166.
  27. Alper Aslan & Kemal Koksal & Oguz Ocal, 2011. "Competitive Environment Hypothesis in Turkish Banking System," International Journal of Economics and Financial Issues, Econjournals, vol. 1(2), pages 74-77, June.
  28. Waring, Geoffrey F, 1996. "Industry Differences in the Persistence of Firm-Specific Returns," American Economic Review, American Economic Association, vol. 86(5), pages 1253-65, December.
  29. Luintel, Kul B, 2001. "Heterogeneous Panel Unit Root Tests and Purchasing Power Parity," Manchester School, University of Manchester, vol. 69(0), pages 42-56, Supplemen.
  30. Pesaran, M. Hashem, 2004. "General Diagnostic Tests for Cross Section Dependence in Panels," IZA Discussion Papers 1240, Institute for the Study of Labor (IZA).
  31. Geoffrey Whittington & Mark Tippett, 1999. "The Components of Accounting Ratios as Co-integrated Variables," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(9-10), pages 1245-1273.
  32. Adelina Gschwandtner, 2004. "Evolution of Profit Persistence in the US: Evidence from four 20-years periods," Vienna Economics Papers 0410, University of Vienna, Department of Economics.
  33. Rod Cross, 2000. "Hysteresis and Emu," Metroeconomica, Wiley Blackwell, vol. 51(4), pages 367-379, November.
  34. Piotr Lewandowski, 2006. "PESCADF: Stata module to perform Pesaran's CADF panel unit root test in presence of cross section dependence," Statistical Software Components S456732, Boston College Department of Economics, revised 08 Oct 2007.
  35. Bentzen, Jan & Madsen, Erik Strøjer & Smith, Valdemar & Dilling-Hansen, Mogens, 2004. "Persistence in Corporate Performance? - Empirical Evidence from Panel Unit Root Tests," Working Papers 04-15, University of Aarhus, Aarhus School of Business, Department of Economics.
  36. Breusch, T.S. & Pagan, A.R., . "The Lagrange multiplier test and its applications to model specification in econometrics," CORE Discussion Papers RP -412, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  37. A. M. Spence, 1981. "The Learning Curve and Competition," Bell Journal of Economics, The RAND Corporation, vol. 12(1), pages 49-70, Spring.
  38. Schwalbach, Joachim & Gra[beta]hoff, Ulrike & Mahmood, Talat, 1989. "The dynamics of corporate profits," European Economic Review, Elsevier, vol. 33(8), pages 1625-1639, October.
  39. Marshall, Alfred, 1890. "The Principles of Economics," History of Economic Thought Books, McMaster University Archive for the History of Economic Thought, number marshall1890.
  40. Jesús Crespo-Cuaresma & Adelina Gschwandtner, 2003. "The competitive environment hypothesis revisited: Nonlinearity, nonstationrity and profit persistence," Vienna Economics Papers 0316, University of Vienna, Department of Economics.
  41. Glen, Jack & Lee, Kevin & Singh, Ajit, 2001. "Persistence of profitability and competition in emerging markets," Economics Letters, Elsevier, vol. 72(2), pages 247-253, August.
  42. M. Hashem Pesaran & Badi H. Baltagi, 2007. "Heterogeneity and cross section dependence in panel data models: theory and applications introduction," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 22(2), pages 229-232.
  43. John Goddard & Phil Molyneux & John O. S. Wilson, 2004. "The profitability of european banks: a cross-sectional and dynamic panel analysis," Manchester School, University of Manchester, vol. 72(3), pages 363-381, 06.
  44. Collins, Norman R & Preston, Lee E, 1969. "Price-Cost Margins and Industry Structure," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 271-86, August.
  45. Strauss, Jack & Yigit, Taner, 2003. "Shortfalls of panel unit root testing," Economics Letters, Elsevier, vol. 81(3), pages 309-313, December.
  46. Adelina Gschwandtner & Michael Hauser, 2008. "Modelling profit series: nonstationarity and long memory," Applied Economics, Taylor & Francis Journals, vol. 40(11), pages 1475-1482.
  47. Mueller, Dennis C, 1977. "The Persistence of Profits above the Norm," Economica, London School of Economics and Political Science, vol. 44(176), pages 369-80, November.
  48. Kamerschen, David R, 1969. "The Determination of Profit Rates in "Oligopolistic Industries."," The Journal of Business, University of Chicago Press, vol. 42(3), pages 293-301, July.
  49. Odagiri, Hiroyuki & Yamawaki, Hideki, 1986. "A study of company profit-rate time series : Japan and the United States," International Journal of Industrial Organization, Elsevier, vol. 4(1), pages 1-23, March.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:eee:jebusi:v:66:y:2013:i:c:p:76-97. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.