Earnings Mean Reversion or Cyclicality: Capacity Expansion as Delayed Negative Feedback
Posted: 30 Dec 2012
Date Written: December 30, 2012
I document evidence that short-horizon earnings mean reversion is the initial portion of a long-horizon cycle in firm earnings, and motivate a theory for how industry level capital expenditure forms a delayed negative feedback loop around firm earnings, driving the cycle. Regression results detect a relationship between the time to build capacity, measured in previous research, and the length of earnings cycles that I measure using Fourier transforms of aggregate industry earnings changes. Additionally, I find that specific delays of industry-level capacity expansion are a significant determinant of future firm-level earnings.
Keywords: earnings mean reversion, earnings cycles, feedback loop, time-to-build capacity
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