Revisiting mean reversion in profitability and earnings: evidence from India (2007–2020)

Abstract

PurposeThe purpose of this article is to revisit the mean reversion in profitability and earnings among Indian-listed firms, based on the idea that changes in profitability and earnings are somewhat predictable.Design/methodology/approachThe study used a sample of 445 Bombay Stock Exchange (BSE)-listed companies and 309 companies from the manufacturing sector in India for the period from 2007 to 2020. The study employed cross-sectional regressions. Both linear and non-linear Partial Adjustment Models (PAM) were used to forecast profitability and earnings.FindingsThe study revealed that profitability and earnings mean revert for both the BSE-listed companies and the manufacturing sector companies from 2007 to 2012. However, for the years from 2013 to 2020, it was found that there is no significant evidence of mean reversion in both the BSE-listed companies or the manufacturing sector companies.Practical implicationsThe findings have larger implications for security analysts who forecast future stabilisation or recovery of historically high or low growth rates. Investors and analysts would benefit from having a better understanding of how competitive attacks affect profitability as well as how the overall economic growth of a country affects earnings and valuations.Originality/valueMost of the empirical research in India has focused on mean reversion in stock prices or stock returns. The present study looked at the mean reversion of profitability and earnings in Indian firms.