Reversion of RNOA and Its Components
Posted: 1 Oct 2014
Date Written: September 30, 2014
Prior research documents the reversion to a mean value over time of returns on assets and equity and increasing rates of reversion for firms that are farther from the mean and for poorly performing firms. Researchers have also begun to explore factors that may have predictive ability for expected reversion, such as changes in the profit margin and asset turnover, in an effort to increase forecasting accuracy. My study adds to this line of research and provides a comprehensive investigation of the reversion characteristics of the components of both the numerator and the denominator of the returns ratio. I find that the observed reversion of returns is associated with reversions of both its numerator and its denominator. I also find that components of earnings in the numerator and net assets in the denominator exhibit differing rates of reversion and that these differences in the rates of reversion of the income statement and balance sheet components can be exploited to improve forecasts of the return ratio.
Keywords: RNOA; Reversion of RNOA
JEL Classification: M41
Suggested Citation: Suggested Citation