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A Dynamic Financial Ratio Adjustment Model

Author

Listed:
  • Yating Yang
  • H.W. Chuang

Abstract

This paper proposes an alternative model for analyzing the dynamic adjustment process of financial ratios; the model includes a firm’s internal effect, industry-wide effect, and strategic management. The model can explain (1) that a firm’s financial ratios reflect unexpected changes in the industry, (2) active attempts to achieve the desired target by management, and (3) an individual firm’s financial ratio movement. We consider the internal effect of the dynamic adjustment process of financial ratios to an equilibrium state on a firm, and use quarterly data rather than annual data for examining these effects. Empirical findings indicate that the specific effect on the firm indeed improves the explanatory ability of the dynamic adjustment process of financial ratios. Further, optimal target financial ratios may be affected by a firm’s internal movement, external shocks, and strategic adjustment by the management.

Suggested Citation

  • Yating Yang & H.W. Chuang, 2010. "A Dynamic Financial Ratio Adjustment Model," Global Journal of Business Research, The Institute for Business and Finance Research, vol. 4(3), pages 1-10.
    • Handle: RePEc:ibf:gjbres:v:4:y:2010:i:3:p:1-10
    as

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    References listed on IDEAS

    as
    1. Kallunki, Juha-Pekka & Martikainen, Minna, 1999. "Do firms use industry-wide targets when managing earnings? Finnish evidence," The International Journal of Accounting, Elsevier, vol. 34(2), pages 249-259, June.
    2. Wu, Chunchi & Ho, Shih-Jen Kathy, 1997. "Financial Ratio Adjustment: Industry-Wide Effects or Strategic Management," Review of Quantitative Finance and Accounting, Springer, vol. 9(1), pages 71-88, July.
    3. Frecka, Tj & Lee, Cf, 1983. "Generalized Financial Ratio Adjustment Processes And Their Implications," Journal of Accounting Research, Wiley Blackwell, vol. 21(1), pages 308-316.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Financial ratio adjustment; Industry-wide effect; Lev’s model;
    All these keywords.

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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