Asymmetrical return on equity mean reversion and catering |
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Authors: | An-Sing Chen Shih-Chieh Lin |
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Affiliation: | a National Chung Cheng University, Department of Finance, 168 University Rd., Min-Hsiung, Chia-Yi, Taiwan, ROC b Providence University, Department of Accounting, 200 Chung Chi Rd., Sha-Lu, Taichung, Taiwan, ROC |
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Abstract: | Using a momentum threshold autoregression model, we find evidence showing that there is an asymmetrical mean reversion behavior in return on equity (ROE). Results show that the speed of adjustment of ROE towards the long-term mean is slower in the ROE increasing regimes than in the ROE decreasing regimes. Additional results indicate that investor earnings optimism is significantly related to change in abnormal ROE. These results are consistent with predictions from catering theory. |
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Keywords: | C40 G14 M41 |
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