'Oscillate Wildly': asymmetries and persistence in company-level profitability
AbstractThis paper examines company-level persistence in profitability over the period 1975-98. The competitive forces that act to compete away abnormal returns need not act symmetrically and may differ at different points in the distribution of profitability. This suggestion is tested empirically on an unbalanced panel of 2,129 companies. First, evidence for both asymmetries and non-linearities in the persistence of company profitability is found. The results are consistent with the notion that competitive forces act less swiftly to eliminate superior returns than inferior returns and/or that companies attempts to allocate a positive result to more years than they would allocate a poor result. Second, by imposing a linear specification, previous studies are likely to have understated the extent of persistence of superior profitability. Third, industry variation in the extent of profit persistence is considered. Under the standard linear model such variation across industries is quite small. A greater degree of variation between industries is found when allowing for persistence in a non-linear fashion. But the finding that higher profitability persists more than low profitability is common across each industry.
Download InfoIf 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.
Bibliographic InfoPaper provided by Bank of England in its series Bank of England working papers with number 128.
Date of creation: Apr 2001
Date of revision:
Contact details of provider:
Postal: Publications Group Bank of England Threadneedle Street London EC2R 8AH
Phone: +44 (0)171 601 4030
Fax: +44 (0)171 601 5196
Web page: http://www.bankofengland.co.uk/
More information through EDIRC
This paper has been announced in the following NEP Reports:
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.:
- M Arellano & O Bover, 1990.
"Another Look at the Instrumental Variable Estimation of Error-Components Models,"
CEP Discussion Papers
dp0007, Centre for Economic Performance, LSE.
- Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, Elsevier, vol. 68(1), pages 29-51, July.
- Stephen Bond & Costas Meghir, 1990.
"Dynamic Investment Models and the Firm's Financial Policy,"
CEPR Financial Markets Paper, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ
0013, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
- Bond, Stephen & Meghir, Costas, 1994. "Dynamic Investment Models and the Firm's Financial Policy," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(2), pages 197-222, April.
- Nickell, Stephen J, 1981. "Biases in Dynamic Models with Fixed Effects," Econometrica, Econometric Society, Econometric Society, vol. 49(6), pages 1417-26, November.
- Auerbach, Alan J, 1986.
"The Dynamic Effects of Tax Law Asymmetries,"
Review of Economic Studies, Wiley Blackwell,
Wiley Blackwell, vol. 53(2), pages 205-25, April.
- Stephen Nickell & Daphne Nicolitsas, 1995.
"How does financial pressure affect firms?,"
LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library
20698, London School of Economics and Political Science, LSE Library.
- Stephen Nickell & D Nicolitsas, 1995. "How Does Financial Pressure Affect Firms?," CEP Discussion Papers dp0266, Centre for Economic Performance, LSE.
- Nickell, S. & Nicolitsas, D., 1995. "How Does Financial Pressure Affect Firms," Economics Series Working Papers 99170, University of Oxford, Department of Economics.
- Waring, Geoffrey F, 1996. "Industry Differences in the Persistence of Firm-Specific Returns," American Economic Review, American Economic Association, American Economic Association, vol. 86(5), pages 1253-65, December.
- Mueller, Dennis C, 1977. "The Persistence of Profits above the Norm," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 44(176), pages 369-80, November.
- Stephen R. Bond & Jason G. Cummins, 2000. "The Stock Market and Investment in the New Economy: Some Tangible Facts and Intangible Fictions," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(1), pages 61-124.
- Blundell, R. & Bond, S., 1995.
"Initial Conditions and Moment Restrictions in Dynamic Panel Data Models,"
104, Economics Group, Nuffield College, University of Oxford.
- Blundell, Richard & Bond, Stephen, 1998. "Initial conditions and moment restrictions in dynamic panel data models," Journal of Econometrics, Elsevier, Elsevier, vol. 87(1), pages 115-143, August.
- Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers, Institute for Fiscal Studies W95/17, Institute for Fiscal Studies.
- R Blundell & Steven Bond, . "Initial conditions and moment restrictions in dynamic panel data model," Economics Papers W14&104., Economics Group, Nuffield College, University of Oxford.
- Anita M. McGahan & Michael E. Porter, 1999. "The Persistence of Shocks to Profitability," The Review of Economics and Statistics, MIT Press, vol. 81(1), pages 143-153, February.
- Basu, Sudipta, 1997. "The conservatism principle and the asymmetric timeliness of earnings," Journal of Accounting and Economics, Elsevier, Elsevier, vol. 24(1), pages 3-37, December.
- Ball, Ray & Watts, Ross, 1972. "Some Time Series Properties of Accounting Income," Journal of Finance, American Finance Association, American Finance Association, vol. 27(3), pages 663-81, June.
- Blundell, Richard & Bond, Stephen & Devereux, Michael & Schiantarelli, Fabio, 1992. "Investment and Tobin's Q: Evidence from company panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 51(1-2), pages 233-257.
- 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,
Wiley Blackwell, vol. 58(2), pages 277-97, April.
- Tom Doan, . "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Posner, Richard A, 1975. "The Social Costs of Monopoly and Regulation," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 83(4), pages 807-27, August.
- Quah, Danny, 1993.
"Empirical cross-section dynamics in economic growth,"
European Economic Review, Elsevier,
Elsevier, vol. 37(2-3), pages 426-434, April.
- Danny Quah, 1992. "Empirical Cross-Section Dynamics in Economic Growth," FMG Discussion Papers, Financial Markets Group dp154, Financial Markets Group.
- Danny Quah, 1992. "Empirical cross-section dynamics in economic growth," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 75, Federal Reserve Bank of Minneapolis.
- Tarziján, Jorge & Brahm, Francisco & Daiber, Luis Felipe, 2008. "Entrepreneurial profitability and persistence: Chile versus the U.S.A," Journal of Business Research, Elsevier, Elsevier, vol. 61(6), pages 599-608, June.
- Greenhalgh, Christine & Rogers, Mark, 2006.
"The value of innovation: The interaction of competition, R&D and IP,"
Research Policy, Elsevier,
Elsevier, vol. 35(4), pages 562-580, May.
- Christine Greenhalgh & Mark Rogers, 2004. "The Value of Innovation: The Interaction of Competition, R&D and IP," Economics Series Working Papers 192, University of Oxford, Department of Economics.
- Miles Parker, 2006. "Diverging Trends in Aggregate and Firm-Level Volatility in the UK," Discussion Papers, Monetary Policy Committee Unit, Bank of England 16, Monetary Policy Committee Unit, Bank of England.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publications Team).
If references are entirely missing, you can add them using this form.