Double Entry Bookkeeping and the Distributional Properties of a Firm's Financial Ratios

24 Pages Posted: 12 Jul 2004

See all articles by David J. Ashton

David J. Ashton

University of Bristol - Department of Economics

Paul V. Dunmore

Mark J. Tippett

Loughborough University - Business School; University of Exeter Business School

Abstract

Our purpose here is to assess whether the innate properties of the double entry bookkeeping system are such that financial ratios, calculated from the balance sheet summary measures implied by it, will be generated by distributional forms with non-convergent moments. Our analysis begins with a brief summary of some important analytical properties of the debt and equity components of the double entry bookkeeping system. We then use these to determine the time series and distributional properties of the debt to equity ratio itself. Our analysis shows that even when the evolution of balance sheet summary measures like debt and equity can be described by 'well behaved' distributional processes, there is a distinct possibility that ratios derived from them will evolve in terms of distributional forms with non-convergent moments. We argue that this has serious implications for parameter estimation as well as the integrity of the regression and/or discriminant procedures which underscore bankruptcy and financial distress prediction models based on financial ratios derived from the double entry bookkeeping system.

JEL Classification: G12, M41, G33

Suggested Citation

Ashton, David John and Dunmore, Paul and Tippett, Mark J., Double Entry Bookkeeping and the Distributional Properties of a Firm's Financial Ratios. Journal of Business Finance & Accounting, Vol. 31, No. 5-6, pp. 583-606, June 2004. Available at SSRN: https://ssrn.com/abstract=563429

David John Ashton

University of Bristol - Department of Economics ( email )

8 Woodland Road
Bristol BS8 ITN
United Kingdom
+44 (0)117 928 8423 (Phone)

Mark J. Tippett (Contact Author)

Loughborough University - Business School ( email )

Ashby Road
Loughborough
Nottingham NG1 4BU, LE11 3TU
Great Britain

University of Exeter Business School ( email )

Streatham Court
Xfi Building, Rennes Dr.
Exeter, EX4 4JH
United Kingdom

No contact information is available for Paul Dunmore

Register to save articles to
your library

Register

Paper statistics

Downloads
16
Abstract Views
2,115
PlumX Metrics