Title: Using profit persistence to predict stock returns: An alternative model
Authors: Michael Hauser - Vienna University of Economics and Business (Austria) [presenting]
Adelina Gschwandtner - University of Kent (United Kingdom)
Abstract: The fact that past profit rates are a successful predictor for future stock returns has been previously established. The aim is to show how deviations from a firm specific long run profit rate, and a firm specific deviation from the cross-section profit rate can be used to forecast stock returns. Thereby also nonlinear but symmetric effects are found. We implement a 2-step estimation procedure. In the 1st step the long run profit rate is estimated, which is introduced as an explanatory variable measured with errors in the return equation. Date are a merged set of the Compustat and CRSP data base for 1963-2006. The persistence of profits literature in industrial economics helps to justify these effects.