The persistence of abnormal return on assets: an exploratory analysis of the performance of firms by country and sector
Article first published online: 24 APR 2014
Copyright © 2014 John Wiley & Sons, Ltd.
Applied Stochastic Models in Business and Industry
Volume 30, Issue 5, pages 609–631, September/October 2014
How to Cite
2014), The persistence of abnormal return on assets: an exploratory analysis of the performance of firms by country and sector, Appl. Stochastic Models Bus. Ind., 30, pages 609–631, doi: 10.1002/asmb.2034, , , and (
- Issue published online: 3 OCT 2014
- Article first published online: 24 APR 2014
- Manuscript Accepted: 17 MAR 2014
- Manuscript Revised: 18 DEC 2013
- Manuscript Received: 26 JUL 2011
- Dynamic models;
- Bayesian inference;
- abnormal returns;
- persistence of profits;
- return on assets
This study offers an exploratory statistical analysis of the persistence of annual abnormal returns across a sample of firms from different European Union countries. To this end, a hierarchical Bayesian dynamic model has been used that enables the annual behaviour of those profits to be broken down into a permanent structural component and a transitory component, while also distinguishing between general effects affecting the industry as a whole and specific effects impacting on each firm in particular. This breakdown of the behaviour of profits allows for a more accurate assessment of the relative importance of these fundamental components by country and sector. Furthermore, through the Bayesian approach, it is possible to test different hypotheses about the homogeneity of the dynamic behaviour of the aforementioned components with respect to the sector and the country where the firm develops its activity.
We find that although both the industry and firm effects are significant, the latter are more important to explain the dynamic evolution of abnormal returns. Specifically, firm effects account for 68% of total variation of the abnormal returns and display a lower degree of persistence with adjustment speeds oscillating at around 34%, while industry effects only account for 9% and have adjustment speeds oscillating between 7% and 8%. However, this pattern is not homogeneous and depends on the sector and country in which the firm carries out its activity. These results highlight the need to take into account both aspects simultaneously in order to analyse the dynamic behaviour of abnormal returns. Copyright © 2014 John Wiley & Sons, Ltd.