Title

Financial Ratio Adjustment: Industry-Wide Effects or Strategic Management

Publication Type

Journal Article

Publication Date

1997

Abstract

This paper proposes an 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 relative 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.

Discipline

Business

Research Areas

Finance

Publication

Review of Quantitative Finance and Accounting

Volume

9

Issue

1

First Page

71

Last Page

88

ISSN

0924-865X

Identifier

10.1023/a:1008231027420