Financial Ratio Adjustment Dynamics and Interest Rate Expectations

Abstract

This paper re‐examines the financial ratio adjustment model by (1) respecifying the model such that the speed of adjustment coefficient follows a dynamic adjustment process in response to some kind of economic shocks, and (2) proposing a joint estimation of firms within the same industry to capture unobservable industry effects. Examining six financial ratios within seven industries that contain 85 firms, our results reveal that a joint estimation method substantially improves the traditional model based upon an OLS method and that economic shocks, measured by changes in interest rate expectations, affect the speed of adjustment coefficients for over one‐third of the sampling firms.

Financial Ratio Cross‐section Dynamics: a Non‐parametric Approach

“…The set of financial ratios selected for this study is the same as the set used in Lev (1969), Frecka and Lee (1983), Lee and Wu (1988), Peles and Schneller (1989) and Chen and Ainina (1994). They represent the most important categories of financial ratios and include the current ratio, the acid test (both short term liquidity), the net operating income to total assets ratio (return on investment), the equity to total debt ratio (long term solvency), the sales to total assets ratio (long term capital turnover) and the sales to inventory ratio (short term capital turnover).…”

“…Lee and Wu (1988) show that adjustment of financial ratios is not instantaneous when the industrial mean is subject to random changes and that firm size and industry factors influence the speed of adjustment. Other studies look at more refinements of the basic partial adjustment model and try to link more economic variables to the meaning of the model, such as the importance of micro/macro economic shocks affecting the cost and information set available to decision makers as in Chen and Ainina (1994). This paper departs from the previous ones by investigating the maintained assumption behind the basic partial adjustment model, that is, the idea that firms adjust/converge to some optimal industry target.…”

“…They find that all examined ratios follow a partial adjustment process with finite adjustment durations. Recently, Chen and Ainina (1994) estimate a partial adjustment model where the speed of adjustment is treated as a timevarying parameter which incorporates the impact of omitted macro or micro economic variables. They use interest rate expectations as a variable and confirm the partial adjustment processes followed by financial ratios.…”

¿Hay efectos de interacción regional en el comportamiento financiero de las PyME?

“…En primer lugar, destacamos la teoría basada en el proceso de ajuste parcial la cual propone un modelo para evaluar el comportamiento de las empresas, por medio del análisis de la dinámica de los índices financieros en relación con los valores promedio de la industria (Davis y Peles, 1993;Chen y Ainina, 1994;Wu y Ho, 1997;Gallizo y Salvador, 2003;Gallizo et al, 2008). En este contexto, una de las dimensiones de las empresas estudiadas ha sido la estructura de capital.…”

“…Con base en la metodología econométrica espacial se analiza los efectos de las interrelaciones es- 6 Se han mitigado los posibles problemas de heterogeneidad asociados con la agregación de la información en cada provincia al seleccionar los criterios de la muestra (por tamaño y sector). Algunos de los estudios anteriores que se han desarrollado en este contexto y que toman la empresa como unidad de análisis, han concluido que las diferencias fundamentales entre las proporciones de endeudamiento se asocian con el tamaño y la actividad principal de la empresa (Davis y Peles, 1993;Chen y Ainina, 1994;Wu y Ho, 1997;Gallizo y Salvador, 2003).…”