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Forecasting Profitability and Earnings

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Author Info
Fama, Eugene F
French, Kenneth R

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Abstract

There is a strong presumption in economics that, in a competitive environment, profitability is mean reverting. We provide corroborating evidence. In a simple partial adjustment model, the estimated rate of mean reversion is about 38% per year. But a simple partial adjustment model with a uniform rate of mean reversion misses rich nonlinear patterns in he behavior of profitability. Specifically, we find that mean reversion is faster when profitability is below its mean and when it is further from its mean in either direction. We also show that the mean reversion in profitability produces predictable variation in earnings. Copyright 2000 by University of Chicago Press.

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Publisher Info
Article provided by University of Chicago Press in its journal Journal of Business.

Volume (Year): 73 (2000)
Issue (Month): 2 (April)
Pages: 161-75
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Handle: RePEc:ucp:jnlbus:v:73:y:2000:i:2:p:161-75

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  3. Pástor, Lubos & Taylor, Lucian & Veronesi, Pietro, 2007. "Entrepreneurial Learning, the IPO Decision, and the Post-IPO Drop in Firm Profitability," CEPR Discussion Papers 6061, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  12. A Cosh & P Guest, 2001. "The Long-Run Performance of Hostile Takeovers: UK Evidence," ESRC Centre for Business Research - Working Papers wp215, ESRC Centre for Business Research. [Downloadable!]
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  15. Schelleman,C., 2001. "Determinants of the profitability of audit engagements; An empirical study," Research Memoranda 024, Maastricht : METEOR, Maastricht Research School of Economics of Technology and Organization. [Downloadable!]
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