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Financial Ratio Adjustment Dynamics And Interest Rate Expectations

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  • Carl R. Chen
  • Fall Ainina

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.

Suggested Citation

  • Carl R. Chen & Fall Ainina, 1994. "Financial Ratio Adjustment Dynamics And Interest Rate Expectations," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 21(8), pages 1111-1126, December.
    • Handle: RePEc:bla:jbfnac:v:21:y:1994:i:8:p:1111-1126
    DOI: 10.1111/j.1468-5957.1994.tb00367.x
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