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The Components of Accounting Ratios as Co-integrated Variables

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Author Info

  • Geoffrey Whittington

    (Faculty of Economics and Politics, University of Cambridge,)

  • Mark Tippett
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    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. Copyright Blackwell Publishers Ltd 1999.

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    Bibliographic Info

    Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

    Volume (Year): 26 (1999-11)
    Issue (Month): 9-10 ()
    Pages: 1245-1273

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    Handle: RePEc:bla:jbfnac:v:26:y:1999-11:i:9-10:p:1245-1273

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    Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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    Cited by:
    1. Giorgio Canarella & Stephen M. Miller & Mahmoud M. Nourayi, 2012. "Firm Profitability: Mean-Reverting or Random-Walk Behavior?," Working Papers 1202, University of Nevada, Las Vegas , Department of Economics.
    2. Win Chou & Dominica Lee, 2005. "Panel Cointegration Analysis of Audit Pricing Model," Review of Quantitative Finance and Accounting, Springer, vol. 24(4), pages 423-439, June.

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