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AN EMPIRICAL INVESTIGATION OF THE CONNECTIONS BETWEEN FINANCIAL RATIOS AND OPERATING CHARACTERISTICS OF HOMOGENEOUS GROUPS OF MANUFACTURING FIRMS
Abstract
The general question addressed by this study was the extent to which industry operating characteristics are reflected in financial ratios of homogeneous groups of firms. Two methods of defining homogeneous groups of firms were used: (1) externally assigned industry (SIC) codes, and (2) financial ratios. Fifty financial ratios for December 31 year end COMPUSTAT firms from five manufacturing industries (food, petroleum, chemical/drug, and primary and fabricated metal) were examined for the period 1969-1979 to determine intraindustry homogeneity and interindustry heterogeneity. The methodology of the study involved three phases. First, factor analysis was applied to each set of SIC industry data for 1978. The factors emerging generally corresponded to seven factors identified in other studies--cash position, capital intensiveness, return on investment, receivables and inventory turnover, short-term liquidity, and leverage. Working capital emerged as a separate factor for the food and fabricated metal industries. There was an intermingling of leverage and return on investment for some industries and return on investment split on two dimensions for some industries. Industry operating characteristics appearing were product life, asset composition, and methods of product differentiation. Canonical correlation was then used to assist the selection of a reduced set of ratios for subsequent stages. Existence of industry differences in financial levels was examined in the second stage using analysis of variance. Statistically significant industry differences were identified for selected sets of industries for each ratio for at least some years in the period 1969-1979. Leverage did not exhibit industry effects after 1974. Product life or durability, length of production process, rate of innovation, nature of production process, fixed asset composition, integration, and barriers to entry were some operating characteristics identified. Ratios were examined in a multivariate setting in the third phase of the study. Cluster analysis was used to group firms on the basis of financial ratios. A comparison of the clusters with SIC codes indicated the only industry approaching homogeneity was petroleum. Lack of homogeneity obscured operating characteristics associated with ratio level configurations exhibited by the firms.
Subject Area
Accounting
Recommended Citation
STEPHENS, LYNN MARIE, "AN EMPIRICAL INVESTIGATION OF THE CONNECTIONS BETWEEN FINANCIAL RATIOS AND OPERATING CHARACTERISTICS OF HOMOGENEOUS GROUPS OF MANUFACTURING FIRMS" (1983). ETD collection for University of Nebraska-Lincoln. AAI8318685.
https://digitalcommons.unl.edu/dissertations/AAI8318685