Mean Reversion: Graphical Study of the Phenomenon in the Danish Market

Christian Palm Andersen

Student thesis: Master thesis


The presence of mean reversion in profitability at the firm level is important for valuation and prediction of growth and earnings. This paper investigates the mean reversion in Return on Assets, profit margin and revenue growth for Danish non-listed as well as listed firms for the period 1995-2012. One of the many findings in this study is the highly visible degree of mean reverting in particular Return on Assets. There is a strong presumption in economics that, in a competitive environment, profitability is mean reverting. This paper shows how different firm specific characteristic such as the amount of assets or the age of the firm influence the degree of mean reversion. Specially, I find that mean reversion is faster when profitability is below its mean and when it is further from its mean in either direction. Another great finding is that small firms in general have a higher mean reversion rate than large firms. The results in this paper should have important practical implication for the difficult task of valuing both listed and in particular non-listed firms.

EducationsMSc in Finance and Accounting, (Graduate Programme) Final Thesis
Publication date2019
Number of pages83
SupervisorsJeppe Christoffersen