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The Components of Accounting Ratios as Co‐integrated Variables
Author(s) -
Whittington Geoffrey,
Tippett Mark
Publication year - 1999
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00296
Subject(s) - spurious relationship , econometrics , unit root , logarithm , series (stratigraphy) , mathematics , accounting , statistics , variables , economics , component (thermodynamics) , mathematical analysis , geology , thermodynamics , paleontology , physics
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.