Forecasting Profitability and Earnings
AbstractThere 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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Bibliographic InfoArticle provided by University of Chicago Press in its journal Journal of Business.
Volume (Year): 73 (2000)
Issue (Month): 2 (April)
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Web page: http://www.journals.uchicago.edu/JB/
Other versions of this item:
- Eugene F. Fama & Kenneth R. French, . "Forecasting Profitability and Earnings," CRSP working papers 456, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
- Eugene F. Fama & Kenneth R. French, . "Forecasting Profitability and Earnings," CRSP working papers 358, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
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