Importance of Business Cycles in Accounting Number
Distributions; Empirical Evidence with Finnish Data
Ilkka Virtanen and Paavo Yli-Olli
Summary
The purpose of this study is to analyze the cross-sectional
distributions of twelve common financial ratios and to model the
time-series behavior of these rations during different business cycles.
The selected ratios represent four a priori ratio categories: liquidity,
long-term solvency, profitability and efficiency of the firms. The
analysis shows that all the ratios can be made normally distributed.
Some are already normal in the raw data form (profitability ratios),
while the rest are originally positively skewed and need a square-
root transformation (liquidity ratios, solvency ratios, and efficiency
ratios). Removal of some outliers is also typically needed; their
existence is highly dependent on business cycles. Among efficiency
ratios, a division of the sample into two sub-samples (according to
industry classification) is needed to obtain the desired result. The
discovery that it is possible to model the most important first
moments of ratio distributions with a business cycle index as their
explanator emphasises the importance of business cycles in ratio
distributions.
Key words: Distributions of financial ratios; Transformations;
Outliers.
(A Spectrum of Statistical Thought. Essays in Statistical Theory, Economics
and Population Genetics in Honour of Johan Fellman, 245-276, Helsinki
1991.)