SMABS 2004 Jena University
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European Association of Methodology

Department of methodology and evaluation research

Jena University

Contributions: Abstract

The persistence of abnormal returns at industry and firm levels

Albert Satorra
Universitat Pompeu Fabra
Spain Juan Carlos Bou
Universitat Jaume I. Castell

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 classified as industries are available. The proposed 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) the 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.