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METHODOLOGICAL IMPLICATIONS OF NON‐NORMALLY DISTRIBUTED FINANCIAL RATIOS: A COMMENT
Author(s) -
Horrigan James O.
Publication year - 1983
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/j.1468-5957.1983.tb00462.x
Subject(s) - abandonment (legal) , financial ratio , econometrics , regression analysis , regression , statistics , scale (ratio) , economics , actuarial science , mathematics , finance , geography , political science , cartography , law
This comment argues that proposals to replace financial ratio analysis with regression analysis of the separate ratio components are unnecessary and misguided. Financial ratios are used to predict other variables and not to predict their own components. These ratios also help deal with the size scale problem inherent in regular accounting data, but regression error terms would suffer from the same size effect as the regular data. The actual statistical distribution of financial ratios is an open, important question, but that question in itself does not call for an abandonment of fmancial ratios.