Distributions of Financial Accounting Ratios: Some Empirical Evidence.

Abstract

Abstract The article presents some empirical evidence of distributions of financial accounting ratios. Recent application of advanced statistical techniques to the traditional financial ratio analysis of companies has raised some question concerning the usefulness of these ratios for persons external to the firm. Melvin O'Connor's findings are of particular interest since he found that financial ratios provided little or no assistance in the determination of future rate of return rankings. Most of these studies have employed parametric statistical tools whose validity is somewhat dependent upon the nature of the underlying distribution of the data that is input to the model. The usefulness of studies that classify firms on the basis of accounting ratios can be enhanced considerably if the classification model can be used to make probability estimates about group membership for a particular firm. Such probability assessments are necessary inputs to expectation models. If the empirical distributions of financial accounting ratios were known, then a distribution function could be found for the linear combination of ratios that would be used in a classification model.