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Mean reversion of profitability: evidence from the European‐listed firms
Yener Altunbas1; Antonis Karagiannis1; Ming-Hua Liu2; Alireza Tourani-Rad2
2008-09-26
Source PublicationManagerial Finance
ISSN0307-4358
Volume34Issue:11Pages:799-815
Abstract

Purpose – The purpose of this paper is to investigate the profitability of European Union (EU) firms with the aim of confirming the mean-reverting pattern documented by earlier research in the USA. In addition, the paper classifies firms by industry sectors across countries to investigate potential differences. Design/methodology/approach – The paper follows closely a model where the forecasting of profitability is done through year-by-year regressions. This approach allows the use of large samples and the year-by-year variation in the slopes. Both a linear and a nonlinear partial adjustment models are used for forecasting profitability. Findings – Findings show that the profitability does follow a mean-reverting process and that profitability forecasting can be improved substantially by exploiting the mean-reverting feature. Further analysis shows that mean reversion does not play an important role in EU countries as in the USA and there is no evidence of nonlinearity in mean reversion. It was also found that meanreverting speed differ across industries, with utilities, financial and manufacturing among the lowest. Research limitations/implications – The sample companies are not originated from a single economy, but from 15 different countries with different macro-economic conditions that might influence their profitability. Originality/value – Studying the European market, where the institutional and financial structure of firms are different from the USA allows us to observe whether the US results are sample specific or can be generalized and applied elsewhere. The difference observed in these sample results is probably due to the fact that the US economy is more competitive than that of EU.

KeywordProfit Forecasting Europe Companies
DOI10.1108/03074350810900523
Language英语
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Document TypeJournal article
CollectionFaculty of Business Administration
DEPARTMENT OF FINANCE AND BUSINESS ECONOMICS
Corresponding AuthorAlireza Tourani-Rad
Affiliation1.Centre for Banking and Financial Studies, SBARD, University of Wales, Bangor, UK
2.School of Business, Auckland University of Technology, New Zealand
Recommended Citation
GB/T 7714
Yener Altunbas,Antonis Karagiannis,Ming-Hua Liu,et al. Mean reversion of profitability: evidence from the European‐listed firms[J]. Managerial Finance,2008,34(11):799-815.
APA Yener Altunbas,Antonis Karagiannis,Ming-Hua Liu,&Alireza Tourani-Rad.(2008).Mean reversion of profitability: evidence from the European‐listed firms.Managerial Finance,34(11),799-815.
MLA Yener Altunbas,et al."Mean reversion of profitability: evidence from the European‐listed firms".Managerial Finance 34.11(2008):799-815.
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