The Persistence of Abnormal Returns at Industry and Firm Levels
UPF Economics and Business Working Paper No. 729
34 Pages Posted: 12 Jul 2004
Date Written: November 2003
Abstract
The present paper proposes a model for the persistence of abnormal returns both at firm and industry levels, when longitudinal data for the profits of firms classiffied as industries are available. The model produces a two-way variance decomposition of abnormal returns: (a) at firm versus industry levels, and (b) for permanent versus transitory components. This variance decomposition supplies information on the relative importance of the fundamental components of abnormal returns that have been discussed in the literature. The model is applied to a Spanish sample of firms, obtaining results such as: (a) there are significant and permanent differences between profit rates both at industry and firm levels; (b) variation of abnormal returns at firm level is greater than at industry level; and (c) firm and industry levels do not differ significantly regarding rates of convergence of abnormal returns.
Keywords: Returns of assets, abnormal returns, persistence, two-level, structural equations
JEL Classification: M31, C12, C14, C31, C51
Suggested Citation: Suggested Citation