Evaluating the effects of financial ratio adjustment in European financial statements

Jose Gallizo, Fernando Jimenez and Manuel Salvador

European Accounting Review, 2003, vol. 12, issue 2, 357-377

Abstract: This paper is devoted to an analysis of financial ratio adjustment in European financial statements. To that end, we use an hierarchical model based on the partial adjustment model. This model allows us to distinguish between adjustments that are due to external shocks and which affect all countries, on the one hand, and those resulting from internal shocks which affect the relative position of one country with respect to the rest, on the other. In addition to estimating the average adjustment coefficients of each ratio, we locate those countries that have a behaviour which is significantly different from the rest. We find that, in general, the evolution of the ratios analysed is mainly determined by their adjustments to external shocks, with the ratios related to the profit and loss account demonstrating a greater sensitivity to all types of shocks. By contrast, the debt ratios show the least sensitivity. When considered on a country-by-country basis, the most significant differences appear in the results ratios, with Spain being the country that is most sensitive to external shocks, and Denmark and Germany being least sensitive to all types of shocks.

Date: 2003
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DOI: 10.1080/0963818022000001163

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