Determinants of earnings persistence

Based on a large sample of Spanish companies, this paper explores the determinants of persistence in corporate profitability. Using two different measures of profitability, Return on Assets (ROA) and Return on Equity (ROE), we document that the factors explaining differences in profitability across companies are size (larger firms have greater persistence), and leverage (persistence is lower in leveraged companies). Our results show that accruals have no significant impact on the persistence of ROA and ROE. However, we found that the role of volatility and, to a greater extent, the market-to-book gap as explanatory factors for the persistence of ROE is unclear, as their explanatory power varies in the presence of changes in the specification of the variables. Finally, ROE show high mean reversion when we control for corporate characteristics determinants of persistence.