This paper presents an alternate method for transforming financial ratios. Ratios are ranked and scaled into a uniform distribution with boundaries between 0 and 1. Conceptually, we suggest that this method solves a number of methodological problems associated with ratios, including constrained choice of regression models, ratio outliers, negative ratios, and non-normal distributions. Scaled ranks of financial ratios are also conceptually appealing because they appear to capture comparative ordinal data about cross-sectional relationships between firms.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Oct 6, 2004
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