| Author: | Lipe, R. Kormendi, R. |
| Title: | Mean reversion in annual earnings and its implications for security valuation |
| Journal: | Review of Quantitative Finance and Accounting
1994 : MAR, VOL. 4:1, p. 27-46 |
| Index terms: | EARNINGS SECURITY VALUATION |
| Language: | eng |
| Abstract: | This article documents the long-horizon mean reverting character of annual earnings and tests the implications of such mean reversion for security valuation. Both theory-based and nonparametric measures of earnings persistence decrease as the estimation order increases, revealing 40% less long-horizon persistence than expected under the commonly used random walk model. The return responses to the earnings shocks are more closely related across firms to the higher-order measures of persistence that reflect significant long-horizon mean reversion. |
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