Understanding the behavior of financial ratios: the adjustment process

This paper contributes to our understanding of the behavior of financial ratios by means of a hierarchical Bayesian analysis of the partial adjustment model of financial ratios presented in Davis and Peles [Acc. Rev. 68 (1993) 725]. Such an approach allows us to make a robust estimate of the average adjustment coefficient of a set of firms. The proposed methodology is applied to the analysis of a number of financial ratios considered in the above-mentioned paper corresponding to a sample of US manufacturing firms.