The competitive environment hypothesis revisited: non-linearity, nonstationarity and profit persistence

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Abstract
Much empirical literature dealing with the competitive environment hypothesis tends to find nonstationary behaviour and very high persistence in time series of company profits. Profit time series is modelled using a simple threshold autoregressive model that allows for nonstationary behaviour over subsamples. Using a new dataset consisting of profits for more than 150 US companies over a time period of 50 years, statistical evidence is presented that the high persistence observed in profits when using linear autoregressive models is often due to the misspecification of the data generating process.