The Persistence of Abnormal Returns at Industry and Firm Levels

UPF Economics and Business Working Paper No. 729

34 Pages Posted: 12 Jul 2004

See all articles by Juan Carlos Bou

Juan Carlos Bou

Jaume I University - Department of Business Administration and Marketing

Albert Satorra

Universitat Pompeu Fabra

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

Bou, Juan Carlos and Satorra, Albert, The Persistence of Abnormal Returns at Industry and Firm Levels (November 2003). UPF Economics and Business Working Paper No. 729, Available at SSRN: https://ssrn.com/abstract=563306 or http://dx.doi.org/10.2139/ssrn.563306

Juan Carlos Bou

Jaume I University - Department of Business Administration and Marketing ( email )

Avinguda Sos Baynat s/n
12080 Castello
Spain
34-964728537 (Phone)
34-964728629 (Fax)

Albert Satorra (Contact Author)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
(34-93) 542 17 58 (Phone)
(34-93) 542 17 46 (Fax)

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