Forecasting Profitability and Earnings: A Study of the UK Stock Market (1982-2000)

EFMA 2002 London Meetings; School of Accounting, Finance and Economics Edith Cowan University

23 Pages Posted: 27 May 2002

See all articles by David E. Allen

David E. Allen

School of Mathematics and Statistics, The University of Sydney; Financial Research Network (FIRN); Department of Finance; School of Business and Law, Edith Cowan University

Heazry M. Salim

School of Finance and Business Economics

Date Written: March 2002

Abstract

In this paper we apply an approach recently developed by Fama and French (2000) to study whether UK company profitability is mean-reverting. We use a sample of roughly 987 firms per year for a period from 1982-2000, drawn from Datastream. In a simple partial adjustment model we find convergence towards the mean at a rate of about 25% per year. Our results are very similar in direction to those of Fama and French (2000) but our results do not display significant non-linearities. The change in profitability appears to be more strongly influenced by dividends in the UK.

Keywords: UK Company profitability, mean reversion

JEL Classification: D40, G30

Suggested Citation

Allen, David Edmund and Salim, Heazry M., Forecasting Profitability and Earnings: A Study of the UK Stock Market (1982-2000) (March 2002). EFMA 2002 London Meetings; School of Accounting, Finance and Economics Edith Cowan University. Available at SSRN: https://ssrn.com/abstract=312301 or http://dx.doi.org/10.2139/ssrn.312301

David Edmund Allen (Contact Author)

School of Mathematics and Statistics, The University of Sydney ( email )

School of Mathematics and Statistics F07
University of Sydney
Sydney, New South Wales 2006
Australia

HOME PAGE: http://www.maths.usyd.edu.au

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Department of Finance ( email )

Taiwan
Taiwan

School of Business and Law, Edith Cowan University

100 Joondalup Drive
Joondalup, WA 6027
Australia

HOME PAGE: http://www.dallenwapty.com

Heazry M. Salim

School of Finance and Business Economics ( email )

100 Joondalup Drive
Joondalup, WA 6027
Australia

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