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The Components of Accounting Ratios as Co‐integrated Variables

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  • Geoffrey Whittington
  • Mark Tippett

Abstract

Time series of accounting variables may often be non‐stationary, i.e. they have a unit root, as in the common example of a random walk. This can lead to spurious results in time series regression analysis which uses such variables. The problem is overcome if the variables are co‐integrated. This paper examines and tests the proposition that, where the variables are expressed in logarithmic form, calculating a ratio may capture the effects of co‐integration. Thus, accounting ratios (calculated in logarithmic form) might be stationary, and therefore exempt from the econometric pathology associated with their component variables.

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  • Geoffrey Whittington & Mark Tippett, 1999. "The Components of Accounting Ratios as Co‐integrated Variables," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 26(9‐10), pages 1245-1273, November.
    • Handle: RePEc:bla:jbfnac:v:26:y:1999:i:9-10:p:1245-1273
    DOI: 10.1111/1468-5957.00296
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    Cited by:

    1. Canarella, Giorgio & Miller, Stephen M. & Nourayi, Mahmoud M., 2013. "Firm profitability: Mean-reverting or random-walk behavior?," Journal of Economics and Business, Elsevier, vol. 66(C), pages 76-97.

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