Tests of a Partial Adjustment Model of Financial Ratios

• Main Authors: WU, Chunchi, KAO, Chihwa, LEE, Cheng F.
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 1992
• Subjects: Unanticipated money growth; United States; unemployment; Business; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/lkcsb_research/862
• Institution: Singapore Management University

This article considers the formation of expectations in the financial ratio adjustment. An empirical model consistent with the rational-expectations hypothesis is formulated to analyze the dynamic adjustment pattern of financial ratios. The nonlinear regression method is used to estimate the parameters of the rational-expectations model and to test the validity of rationality. The empirical results show that the rational-expectations model explains the dynamic adjustment of financial ratios reasonably well. The results also show that the rational-expectations model provides a more efficient framework than the simple partial adjustment model for predicting the future ratios.