Ratio Analysis Using Rank Transformation

Ratio Analysis Using Rank Transformation 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Ratio Analysis Using Rank Transformation

, Volume 10 (1) – Oct 6, 2004
16 pages

/lp/springer_journal/ratio-analysis-using-rank-transformation-n4FopOmlTr
Publisher
Springer Journals
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008248130384
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 6, 2004

References

• Debt/Equity Ratio and Expected Common Stock Returns: Empirical Evidence
Bhandari, L. C.
• Distributional Forms of Financial Accounting Ratios: Pearson's and Johnson's Taxonomies
Buckmaster, D.; Saniga, E.
• Stock Prices, Earnings and Expected Dividends
Campbell, J. Y.; Shiller, R. J.

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