Studies on the behaviour and implications of corporate profitability on future performance and risk
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Λουκόπουλος, Παναγιώτης
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Abstract
The main aim of this thesis is to investigate the implications of asymmetries of accounting earnings on decision making. We distinguish such asymmetries in two main categories. The first considers the distributional properties of earning, and hence focuses on the potential consequences of the asymmetric distribution of earnings. The second refers to the time-series properties of earnings; thereby it focuses on the potential consequences of the asymmetric evolution of earnings (i.e., heterogeneous persistence or sustainability). To illustrate the economic importance of each of the above two issues, we examine each category of asymmetry within separate empirical contexts. Specifically, we investigate the implications of asymmetries in the distribution of earnings with regard to risk and its linkage with business strategies. On the other hand, for the examination of the implications of the asymmetric persistence in earnings, we adopt a more technical approach, and examine how the elements of the earnings generating contribute to asymmetric mean reversion patterns.
Regarding the first type of asymmetry, we follow the strategy taxonomy of Miles and Snow from the organization literature. In this regard, we rely on decision and resource allocation patterns and categorize firms into Prospectors and Defenders. Prospectors are externally oriented organizations, embrace uncertainty, and grow rapidly as they concentrate their efforts in pioneering new products and exploiting market opportunities. At the opposite extreme, defenders are efficiency-oriented firms that operate on narrow and well-established markets. They compete on the basis of pricing policies and high quality products, prefer stability and consistent outcomes, and do not aggressively pursue new opportunities. The empirical analysis indicates that prospectors have lower profitability tendencies and greater occurrences of losses than defenders. Additionally, we show that prospectors are associated with higher total and downside earnings risk than defenders.
Further analysis reveals that the higher (lower) exposure of prospectors to earnings downside (upside) risk is driven by the realized component rather than the accrual component. Specifically, we find that the conservative and efficient investment policy of defenders seems to pay off, as they have as they are exposed to lower downside cash flow risk and higher upside cash flow risk. On the other hand, the growth potential of prospectors is concentrated on the accrual component of earnings, as they have lower downside accrual risk and higher upside accruals risk than defenders.
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Risk implications of earnings asymmetry, Asymmetric mean reversion profitability patterns