EconPapers    
Economics at your fingertips  
 

Firm profitability: Mean-reverting or random-walk behavior?

Giorgio Canarella, Stephen Miller () and Mahmoud M. Nourayi

Journal of Economics and Business, 2013, vol. 66, issue C, 76-97

Abstract: We analyze the stochastic properties of three measures of profitability, return on assets (ROA), return on equity (ROE), and return on investment (ROI), using a balanced panel of US firms during the period 2001–2010. We employ a panel unit-root approach, which assists in identifying competitive outcomes versus situations that require regulatory intervention to achieve more competitive outcomes. Based upon conventional panel unit-root tests, we find substantial evidence supporting mean-reversion, which, in turn, lends support to the long-standing “competitive environment” hypothesis originally set forward by Mueller (1977). These results, however, prove contaminated by the assumption of cross-section independence. After controlling for cross-section dependence, we find that profitability evolves as a non-stationary process in some sectors in the US economy. Our findings, especially taken as a whole, remain fairly robust to various assumptions regarding the underlying data generation process.

Keywords: Cross-section dependence; Unit roots; Panel data; Hysteresis; Firm profitability (search for similar items in EconPapers)
JEL-codes: C23 D22 L25 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6) Track citations by RSS feed

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0148619512000689
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Firm Profitability: Mean-Reverting or Random-Walk Behavior? (2012) Downloads
Working Paper: Firm Profitability: Mean-Reverting or Random-Walk Behavior? (2012) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:66:y:2013:i:c:p:76-97

Access Statistics for this article

Journal of Economics and Business is currently edited by Kenneth J. Kopecky

More articles in Journal of Economics and Business from Elsevier
Bibliographic data for series maintained by Dana Niculescu ().

 
Page updated 2019-11-16
Handle: RePEc:eee:jebusi:v:66:y:2013:i:c:p:76-97