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Financial Ratio Adjustment: Industry-Wide Effects or Strategic Management

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  • Wu, Chunchi
  • Ho, Shih-Jen Kathy

Abstract

This paper proposes al alternative model for analyzing financial ratio behavior. The model postulates that (1) firms' financial ratios reflect unexpected changes in industry conditions; and (2) managers attempt to move their financial ratio toward the long-run desirable target. This model is employed to assess the relay weights of financial ratio movement that are associated with these two forces. The results show that changes in financial ratios can be due to both external shocks and strategic adjustment by management. The amount of financial ratio smoothing due to strategic adjustment appears to be substantial. Furthermore, the speed of convergence toward the optimal targets varies across industries and firms of different size. Copyright 1997 by Kluwer Academic Publishers

Suggested Citation

  • 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.
  • Handle: RePEc:kap:rqfnac:v:9:y:1997:i:1:p:71-88
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    Cited by:

    1. Maté-Sánchez-Val, Mariluz & López-Hernandez, Fernando & Mur-Lacambra, Jesús, 2017. "How do neighboring peer companies influence SMEs’ financial behavior?," Economic Modelling, Elsevier, vol. 63(C), pages 104-114.
    2. George, Gerard & Zahra, Shaker A. & Wood, D. Jr., 2002. "The effects of business-university alliances on innovative output and financial performance: a study of publicly traded biotechnology companies," Journal of Business Venturing, Elsevier, vol. 17(6), pages 577-609, October.
    3. Gallizo, Jose L. & Salvador, Manuel, 2003. "Understanding the behavior of financial ratios: the adjustment process," Journal of Economics and Business, Elsevier, vol. 55(3), pages 267-283.
    4. repec:mth:ber888:v:7:y:2017:i:1:p:242-260 is not listed on IDEAS
    5. Heiko Thimm & Karsten Boye Rasmussen & Wolfgang Gohout, 2016. "Website quality and performance indicators including ratio numbers – A study of German and Danish SME companies," Journal of Business, LAR Center Press, vol. 1(3), pages 22-36, July.
    6. Paul Hong & Stephen K. Callaway & Soon W. Hong, 2016. "Open network innovation in the age of complexity: case for small and medium enterprises," International Journal of Business Innovation and Research, Inderscience Enterprises Ltd, vol. 10(1), pages 65-86.
    7. Amanda E. Willsey & Dona Siregar, 2012. "The Effects Of The 2008-2009 Financial Crisis On U.S. Corporate Debt Structure," New York Economic Review, New York State Economics Association (NYSEA), pages 16-32.
    8. Mate-Sanchez, Mariluz & López Hernández, Fernando A. & Lacambra, Jesus Mur, 2012. "Analyzing long-term average adjustment of financial ratios with spatial interactions," Economic Modelling, Elsevier, vol. 29(4), pages 1370-1376.
    9. Jose Luis Gallizo & Pilar Gargallo & Manuel Salvador, 2008. "Multivariate partial adjustment of financial ratios: a Bayesian hierarchical approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 43-64.

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