The Persistence of Abnormal Returns: Analysis of Polish Manufacturing Industry

Abstract

(ProQuest: ... denotes formulae omitted.)IntroductionSince the pioneering studies on of profit conducted by Mueller (1977), Mueller (1986) and Geroski and Jacquemin (1988) the literature has developed considerably. One of the reasons is the availability of firm-level data. Having comparable datasets about large number of companies, we are able to test theoretical models. This paper aims at testing the expected mean-reverting property of abnormal profit. From the theoretical point of view the competitive process should erode any abnormal profit in the market. In other words, in the competitive environment companies are not expected to have abnormal returns for long period of time and profit rates should converge to industry equilibrium level. However empirical data show that, at a given point in time profit rates differ widely not only across industries, but also across companies from the same industry. Moreover, many studies proved that abnormal profits are observed over longer period of time and this phenomenon is known in the literature as persistence of abnormal returns (Muller, 1986, 1990).Although the research literature about differences in profitability of firms is enormous, the question remains still open whether these differences disappear eventually. Theory assumes that abnormal profit attracts new entrants and if there are no significant barriers to entry, this finally leads to the reduction of prices and profit margins of all firms in the industry. This process persists until the profitability level of equilibrium is reached. This is possible only if the industry is competitive as a structure. Conversely, if firms are able to retain their abnormal profits over time it means that the competition in the industry fails to control the adjustment to long-run equilibrium level. Another question is the rate at which profits are converging to the equilibrium level and this is correlated with the level of competition in the industry. This is especially important from the antitrust law perspective. If abnormal profits disappear at a high pace this means that the competition in the industry is high, while if the rate is rather low this means that the intervention is needed in the industry to achieve competitive environment.1.Persistence of profit - literature reviewThe of profit was investigated by various methods. A number of studies have tested profit using OLS autoregressive method (e.g. Goddard and Wilson, 1999; Gschwandtner, 2005), while the others have been using panel unit-root tests (e.g. Yurtoglu. 2004; Resende, 2006; Aslan et al., 2010, 2011). More recent research departed from OLS method and used state space AR(1) model (Gschwandtner, 2012), Markov chain analysis and GMM (Stephan and Tsapin, 2008), non-linear threshold model (Crespo et al., 2008), asymmetric autoregressive model (McMillan and Wohar, 2011), dynamic panel model estimator (Goddard et al., 2004; Wolszczak-Derlacz and Parteka, 2015; Simionescu et al., 2016).There are studies focused on the question whether the of profit exists as well as studies focused on the factors that impact the profitability of firms. Moreover, some studies are aimed at the analysis of a single country, while the others are performing multinational analysis. Previous results shows that profit coefficient vary by country, industry and period. Many research done for developed countries showed that the coefficient was somewhere between 0.2 to even 0.6. To mention only the outcomes of the pioneer research of Mueller (1990), who founded coefficient for USA at the level of 0.18; Geroski and Jacquemin (1988), who founded 0.49 for UK 0.41 for France and Germany and most recent outcomes of Goddard et al. (2011) found the average for 65 countries (banking industry only) at the level of 0.42; Gschwandtner and Hirsch (2013), who founded 0.06 for Belgium, 0.19 for France, 0. …