Dynamics of corporate profitability: A study of the UK market (1981-2000)

This thesis investigates the behaviour of corporate profits for a sample of firms in the United Kingdom for the period 1981-2000. The competitive environment hypothesis postulates that there is an in built mechanism that forces any deviations back towards the normal rate of return through a cycle of innovation, imitation, entry and exit. One of the main objectives of this study is to determine if corporate profitability follows a random or mean reverting process. The secondary objective concerns the measurement of the mean reverting process. Empirical analysis utilises cross sectional, time series and panel data analysis to uncover the dynamics of corporate earnings and profitability. It is found that corporate profitability follows a mean reverting process. There is evidence that there is convergence towards a mean rate of about 30% per year. Also, the predictable variation in profitability is non-linear. Mean reversion is stronger when profitability is below and when it is further from its mean. The market to book value contains information on the profitability of a firm. Highly profitable firms are found to operate in less competitive environments.

Grantor dc:publisher

Edith Cowan University, Research Online, Perth, Western Australia

Year dc:date

2006

Author dc:creator

• Salim, Heazry M.

• Corporate profits
• Great Britain
• Mathematical models.
• Finance

Repository record dc:identifier

https://ro.ecu.edu.au/theses/347

OAI identifier oai:identifier

oai:ro.ecu.edu.au:theses-1347