Financial ratio distribution irregularities – implications for ratio classification

This paper incorporates studies investigating the distributional characteristics of financial ratios to studies related to empirical classification of financial ratios. Even though the distributional properties of financial ratios have received some attention in prior research, the implications of observed results for financial decision making have not been researched in detail. The empirical analysis of this study is carried out for 10 ratios on Finnish listed firms. The results reveal that the observed distribution irregularities have a significant impact on the results obtained from the empirical classification of financial ratios. A large part of the time-series instability of financial ratio patterns is caused by financial ratio distribution irregularities. In addition, it is discovered that the interpretation of the underlying financial factors of firms may be affected if distribution irregularities are not paid due attention to.