Critical review of models of earnings mean reversion

The hypothesis that earnings are mean reverting was suggested 90 years ago and has been extensively tested since then. Expectations of earnings’ reversion (hereinafter “EMR”) significantly influence pricing shares or forecasts. Despite proposals testing numerous models EMR, there very little inquiry into the meaning those in corporate valuation terms academic literature. Therefore, we see such an as highly desirable. aim this paper is to critically review transitory (vice versa EMR), their methodology, practical applicability results, limitations stemming from characteristics data. We find most recent (EMR) misspecified target reasons EMR. also EMR partly caused by cycles relevant industry economy, company-specific processes accruals. Also, elimination survivorship bias use margins lower-level profitability like ROI ROC instead ROE worth models.