Long-Term Industry Reversals

This study investigates whether, how and why industry performance can drive long-term return reversals. Using data from the UK, we find that firms in losing industries significantly outperform those in winning industries over the subsequent five years. These industry reversals remain strong and persistent after controlling for stock momentum, industry momentum, seasonal effects and traditional risk factors. We find a strong influence of past industry performance on stock return reversals. Our results also show that past industry performance is the driving force behind long-term reversals. Specifically, we find that industry components drive stock reversals, while past stock performance does not explain industry reversals. Further analysis suggests that industry reversals are present in both good and bad states of the economy and are stronger in industries with high valuation uncertainty. This implies that industry reversals are more likely to be a result of mispricing.

URI

http://hdl.handle.net/10454/8530

Version

Accepted manuscript

Citation

Wu Y and Mazouz K (2016) Long-Term Industry Reversals. Journal of Banking and Finance, 68: 236-250.

Link to Version of Record

https://doi.org/10.1016/j.jbankfin.2016.03.017

Type

Article