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The Components of Accounting Ratios as Co-integrated Variables

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  • Geoffrey Whittington

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

  • 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. Copyright Blackwell Publishers Ltd 1999.

Suggested Citation

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