Abstract
Financial ratios are useful in determining the financial strengths and weaknesses of firms. The most commonly used methods for comparing firms through financial ratios are multivariate analysis of variance and multiple discriminant analysis. These methods have been very often used for inferential purposes when the underlying assumptions (e.g. random sampling, normality, homogeneity of variances … ) are not met. A method for comparing firm financial ratios is proposed, it is based on squared ranks and does not require any particular assumptions. The proposed method is devised to explicitly consider the possible difference in variances and to take also into account the dependence among the financial ratios. It is robust against skewness and heavy tailness. This aspect is very important because usually financial ratios, even after removing outliers, are highly skewed and heavy tailed. An application for studying the difference between US and European firms is discussed.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
References
Altman, E.I.: Financial ratios, discriminant analysis and the prediction of corporate bankruptcy. J. Finan. 23, 589–609 (1968)
Altman, E.I., Marco, G., Varetto, F.C.: Corporate distress diagnosis: comparisons using linear discriminant analysis and neural networks (the Italian experience). J. Bank. Financ. 18, 505–529 (1994)
Bedingfield, J.P., Reckers, P.M.J., Stagliano, A.J.: Distributions of financial ratios in the commercial banking industry. J. Financ. Res. 8, 77–81 (1985)
Bhojraj, S., Lee, C.M.C.: Who is my peer? A valuation-based approach to the selection of comparable firms. J. Acc. Res. 40, 407–439 (2002)
Bhunia, A., Sarkar, R.: A study of financial distress based on MDA. J. Manag. Res. 3, 1–11 (2011)
Bird, R.G., McHugh, A.J.: Financial ratios — an empirical study. J. Bus. Finan. Account. 4, 29–45 (1977)
Boughen, P.D., Drury, J.C.: U.K. statistical distribution of financial ratios. J. Bus. Finan. Account. 7, 39–47 (1980)
Bray, J.H., Maxwell, S.E.: Multivariate analysis of variance. Sage Publications. Thousand Oaks, CA (1985)
Chen, K.H., Shimerda, T.A.: An empirical analysis of useful financial ratios. Finan. Manage. 10, 51–60 (1981)
Cucconi, O.: Un nuovo test non parametrico per il confronto tra due gruppi campionari. Giornale Economisti 27, 225–248 (1968)
Damodaran, A.: Damodaran on valuation 2nd ed.. Wiley, New York (2006)
Deakin, E.B.: A discriminant analysis of predictors of business failure. J. Acc. Res. 10, 167–179 (1972)
Deakin, E.B.: Distributions of financial accounting ratios: some empirical evidence. Account. Rev. 51, 90–96 (1976)
Dietrich, M.: Using simple neural networks to analyse firm activity. Sheffield Econ. Res. Papers 14 (2005)
Edmister, R.O.: An empirical test of financial ratio analysis for small business failure prediction. J. Financ. Quant. Anal. 7, 1477–1493 (1972)
Henschke, S., Homburg, C.: Equity valuation using multiples: controlling for differences between firms. Unpublished Manuscript (2009)
Horrigan, J.O.: A short history of financial ratio analysis. Account. Rev. 43, 284–294 (1968)
Hossari, G., Rahman, S.: A comprehensive formal ranking of the popularity of financial ratios in multivariate modeling of corporate collapse. J. Am. Acad. Bus. 6, 321–327 (2005)
Klecka, W.R.: Discriminant analysis. Sage Publications. Beverly Hills, CA (1980)
MacKay, P., Phillips, G.M.: How does industry affect firm financial structure? Rev. Financ. Stud. 18, 1431–1466 (2005)
Marozzi, M.: Some notes on the location-scale Cucconi test. J. Nonparametr. Stat. 21, 629–647 (2009)
Marozzi, M., Santamaria, L.: A dimension reduction procedure for corporate finance indicators. In: Corazza, M., Pizzi, C. (eds.) Mathematical and Statistical Methods for Actuarial Sciences and Finance, pp. 205–213. Springer, Milano (2010)
Marozzi, M.: Composite indicators: a sectorial perspective. In: Perna, C, Sibillo, M. (eds.) Mathematical and Statistical Methods for Actuarial Sciences and Finance, pp. 287–294. Springer, Milano (2012)
Mecimore, C.D.: Some empirical distributions of financial ratios. Manag. Account. 50, 13–16 (1968)
Meric, G., Leveen, S.S., Meric, I.: The financial characteristics of commercial banks involved in interstate acquisitions. Finan. Rev. 26, 75–90 (1991)
Meric, I., Lentz, C., Meric, G.: A comparison of the financial characteristics of French German and UK firms in the electronic and electrical equipment manufacturing industry: 2001–2005. Eur. J. Econ. Financ. Admin. Sci. 7, 87–93 (2007)
Meric, I., McCall, C.W., Meric, G.: U.S. and Japanese electronic and electrical equipment manufacturing firms: a comparison. Internat. Bull. Bus. Admin. 3, 1–5 (2008)
Nilsson, J.N.: Introduction to machine learning. Unpublished book (2010)
O’Connor, M.C.: On the usefulness of financial ratios to investors in common stock. Account. Rev. 48, 339–352 (1968)
Paliwal, M., Kumar, U.A.: Neural networks and statistical techniques: A review of applications. Expert. Syst. Appl. 36, 2–17 (2009)
Pesarin, F., Salmaso, L.: Permutation tests for complex data. Wiley, Chichester (2010)
Ray, B.: Assessing corporate financial distress in automobile industry of India: an application of Altman’s model. Res. J. Finan. Account. 2, 2222–2847 (2011)
Ricketts, D., Stover, R.: An examination of commercial bank financial ratios. J. Bank. Res. 9, 121–124 (1978)
Salmi, T., Dahlstedt, R., Luoma, M., Laakkonen, A.: Financial Ratios as Predictors of Firms’ Industry Branch. Finnish J. Bus. Econ. 37, 263–277 (1988)
Smith, M.: Research methods in accounting, 2nd ed.. Sage Publications, London (2011)
Stevens, D.L.: Financial characteristics of merged firms: a multivariate analysis. J. Financ. Quant. Anal. 8, 149–158 (1973)
Zhang, L., Altman, E., Yen, J.: Corporate financial distress diagnosis model and application in credit rating for listing firms in China. Frontiers Comp. Sc. China 4, 220–236 (2010)
Author information
Authors and Affiliations
Corresponding author
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2014 Springer International Publishing Switzerland
About this chapter
Cite this chapter
Marozzi, M. (2014). A Squared Rank Assessment of the Difference Between US and European Firm Valuation Ratios. In: Corazza, M., Pizzi, C. (eds) Mathematical and Statistical Methods for Actuarial Sciences and Finance. Springer, Cham. https://doi.org/10.1007/978-3-319-02499-8_19
Download citation
DOI: https://doi.org/10.1007/978-3-319-02499-8_19
Publisher Name: Springer, Cham
Print ISBN: 978-3-319-02498-1
Online ISBN: 978-3-319-02499-8
eBook Packages: Mathematics and StatisticsMathematics and Statistics (R0)