Firm Profitability: Mean-Reverting or Random-Walk Behavior?
Stephen Miller () and
Mahmoud M. Nourayi
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Mahmoud M. Nourayi: Loyola Marymount University
No 2012-05, Working papers from University of Connecticut, Department of Economics
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 (1976). 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-sectional 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)
New Economics Papers: this item is included in nep-bec
Date: 2012-02, Revised 2012-10
Note: Stephen M. Miller is corresponding author
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Published in Journal of Economics and Business, in press.
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Journal Article: Firm profitability: Mean-reverting or random-walk behavior? (2013)
Working Paper: Firm Profitability: Mean-Reverting or Random-Walk Behavior? (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:uct:uconnp:2012-05
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