Abstract

http://ssrn.com/abstract=40660
 
 

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Forecasting Profitability And Earnings


Eugene F. Fama


University of Chicago - Finance

Kenneth R. French


Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

February 1999

CRSP Working Paper No. 456

Abstract:     
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 40 percent per year. But a simple partial adjustment model with a uniform rate of mean reversion misses rich non-linear 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.

Number of Pages in PDF File: 18

JEL Classification: G12

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Date posted: November 13, 1997  

Suggested Citation

Fama, Eugene F. and French, Kenneth R., Forecasting Profitability And Earnings (February 1999). CRSP Working Paper No. 456. Available at SSRN: http://ssrn.com/abstract=40660 or http://dx.doi.org/10.2139/ssrn.40660

Contact Information

Eugene F. Fama (Contact Author)
University of Chicago - Finance ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7282 (Phone)
773-702-9937 (Fax)
Kenneth R. French
Dartmouth College - Tuck School of Business ( email )
Hanover, NH 03755
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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