A DYNAMIC FINANCIAL RATIO ADJUSTMENT MODEL

Yating Yang and H.W. Chuang

Global Journal of Business Research, 2010, vol. 4, issue 3, 1-10

Abstract: This paper proposes an alternative model for analyzing the dynamic adjustment process of financial ratios; the model includes a firm’s internal effect, industry-wide effect, and strategic management. The model can explain (1) that a firm’s financial ratios reflect unexpected changes in the industry, (2) active attempts to achieve the desired target by management, and (3) an individual firm’s financial ratio movement. We consider the internal effect of the dynamic adjustment process of financial ratios to an equilibrium state on a firm, and use quarterly data rather than annual data for examining these effects. Empirical findings indicate that the specific effect on the firm indeed improves the explanatory ability of the dynamic adjustment process of financial ratios. Further, optimal target financial ratios may be affected by a firm’s internal movement, external shocks, and strategic adjustment by the management.

Keywords: Financial ratio adjustment; Industry-wide effect; Lev’s model (search for similar items in EconPapers)
JEL-codes: C51 G17 M41 (search for similar items in EconPapers)
Date: 2010
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