City Research Online

Abstract

Among the major extant issues in present day financial analysis is the use of the concept of industry as an analytical framework. Borrowed from the conventional microeconomic theories of the firm the industry concept has been used widely in financial analysis.

The use of the industry concept in financial analysis pre-supposes: 1) the descriptive ability of accounting numbers and 2) industry homogeneity under a given industrial classification system. The research design was to identify financial ratios which distinguished a) between manufacturing and distribution firms and b) among 14 manufacturing industries in a statistically significant and economically meaningful manner employing linear and quadratic discriminant analyses and the Stock Exchange Industrial Classification (SEIC) widely used in the City. The research results showed: 1) that accounting numbers had significant descriptive ability 2) that the manufacturing and distribution sectors were fairly homogeneous although there appeared to be systematic forward or backward integration in certain segments of the sectors and 3) that the manufacturing industries varied widely in terms of homogeneity. The systematic patterns of misclassifications among the 14 manufacturing industries suggested that aggregation of these basic industries on the basis of the observed misclassifications would result in more homogeneous groupings of firms. Accordingly 4- and then 3- group discriminant analyses were carried out. The "super-industry" groupings were more homogeneous and appeared to be justified in terms of similarity of technology, nature of production process etc, as well as in terms of significant narrow spectrum diversification among the basic industries within each super-industry. The results suggested that the criteria used in SEIC needed to be reformulated.

The study also examined both theoretically and empirically a number of other important issues bearing on financial statement analysis which have not received much attention in the literature:

1) the assumptions and empirical validity of ratio transformation of raw accounting numbers.

2) the problem of spurious ratio correlation involving ratios with common deflators.

3) the distributional properties of financial ratios and

4) the dimensionality of accounting information (using principal components analysis).

Publication Type:	Thesis (Doctoral)
Subjects:	H Social Sciences > HF Commerce > HF5601 Accounting H Social Sciences > HG Finance
Departments:	Bayes Business School > Bayes Business School Doctoral Theses Bayes Business School > Faculty of Finance Doctoral Theses

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