Financial ratio adjustment process: Evidence from Taiwan and North America

This paper proposes a dynamic model for analyzing the adjustment process of financial ratios; the model states three effects which are a firm's internal effect, industrywide effect, and strategic management. It helps us to explain (1) that a firm's financial ratios reflect unexpected changes in the industry, (2) active attempts to achieve the desired target by management, and (3) an individual firm's financial ratio movement. Our main contributions are first we consider the firm's internal effect in the dynamic adjustment process to an equilibrium state; and second we examine the characteristics of the proposed model in different industry and country. Empirical results show the proposed model indeed improves the explaining ability than previous studies and firm's internal effect for the dynamic adjustment process of financial ratios has significant effect. Especially the dynamic adjustment processes in Taiwan's electronic companies are close to North America's electronic companies. Active attempts to the desirable target by management are obvious in North America's companies. Furthermore, the predicting errors of the proposed model are generally small comparing to previous studies.