Forecasting profitability and earnings: a study of the UK market (1982–2000)

Abstract

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

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