IDEAS home Printed from https://ideas.repec.org/a/hde/epregl/v73y2022i1p131-154.html
   My bibliography  Save this article

Critical Review Of Models Of Earnings Mean Reversion

Author

Listed:
  • Tomáš Buus

    (University of Economics in Prague, Faculty of Finance and Accounting)

  • Miroslava Vlčková

    (University of South Bohemia in České Budějovice, Faculty of Economics)

Abstract

The hypothesis that earnings are mean reverting was suggested 90 years ago and has been extensively tested since then. Expectations of earnings’ mean reversion (hereinafter “EMR”) significantly influence pricing of shares or earnings forecasts. Despite proposals and testing of numerous models of EMR, there has been very little inquiry into the meaning of those models in corporate and valuation terms in the academic literature. Therefore, we see such an inquiry as highly desirable. The aim of this paper is to critically review the models of transitory earnings (vice versa EMR), their methodology, practical applicability of their results, and their limitations stemming from the characteristics of earnings data. We find that most of the recent models of transitory earnings (EMR) are misspecified in terms of target earnings or reasons of EMR. We also find that EMR is partly caused by cycles in relevant industry or economy, and partly by company-specific processes and accruals. Also, elimination of survivorship bias and use of margins or lower-level profitability like ROI and ROC instead of ROE is worth testing in EMR models.

Suggested Citation

  • Tomáš Buus & Miroslava Vlčková, 2022. "Critical Review Of Models Of Earnings Mean Reversion," Ekonomski pregled, Hrvatsko društvo ekonomista (Croatian Society of Economists), vol. 73(1), pages 131-154.
    • Handle: RePEc:hde:epregl:v:73:y:2022:i:1:p:131-154
    DOI: 10.32910/ep.73.1.6
    as

    Download full text from publisher

    File URL: https://doi.org/10.32910/ep.73.1.6
    Download Restriction: no
    File URL: https://libkey.io/10.32910/ep.73.1.6?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    Keywords

    Transitory Earnings; Profit; Persistence; Mean Reversion;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hde:epregl:v:73:y:2022:i:1:p:131-154. See general information about how to correct material in RePEc.

    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.

    We have no bibliographic references for this item. You can help adding them by using 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Josip Tica (email available below). General contact details of provider: https://edirc.repec.org/data/hdeeeea.html .

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

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.