Views and conclusions expressed in the paper are the responsibility of the authors alone and do not necessarily reflect the views of Norges Bank or The Ministry of Trade and Industry. We thank Faaroq Akram, Øystein Foros and an anonymous referee for useful comments and suggestions. All errors are, of course, ours. Correspondence: Kjell Bjørn Nordal.
Mean Reversion in Profitability for Non-listed Firms
Article first published online: 16 AUG 2010
© 2010 Blackwell Publishing Ltd
European Financial Management
Volume 18, Issue 5, pages 929–949, November 2012
How to Cite
Nordal, K. B. and Næs, R. (2012), Mean Reversion in Profitability for Non-listed Firms. European Financial Management, 18: 929–949. doi: 10.1111/j.1468-036X.2010.00561.x
- Issue published online: 17 OCT 2012
- Article first published online: 16 AUG 2010
- non-listed firms;
- mean reversion
The presence of mean reversion in profitability at the firm level is important for valuation and prediction of growth and earnings. We investigate the mean reversion in accounting profitability for Norwegian non-listed firms for the period 1988–2006. We find a mean reversion rate of about 0.44 per year. This is higher than found in other studies. We also find that small firms have a higher mean reversion rate than large firms. Our results should have important practical implications for the difficult task of valuing non-listed firms. Previously, price-to-book ratios have been used to investigate changes in profitability over time for listed firms. We examine bankruptcy risk as an alternative variable for unlisted firms. We find that bankruptcy risk may help explain changes in profitability, but the results are not as strong as found in previous work.