Mean Reversion in Profitability for Non-listed Firms


  • 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.


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.