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Forecasting Profitability and Earnings*
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Abstract(back to top)
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 the 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.
Bibliographic Information(back to top)
- Forecasting Profitability and Earnings
- Eugene F. Fama and Kenneth R. French
- The Journal of Business
- Vol. 73, No. 2 (April 2000) (pp. 161-175)
Notes and References(back to top)
This item contains 1 note(s).
Notes
* The comments of Douglas Diamond, Elizabeth Gordon, Douglas Hanna, and especially Ray Ball are gratefully acknowledged.
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