Benchmarks for Financial Ratios – a Microeconometric View

Financial ratios for companies are extensively used in accounting and financial management, e.g. in audit, due diligence and failure prediction. Paper discusses the question of the benchmark values for financial ratios. It is argued that benchmarks should be rooted in the adequate definitions and the distributional properties of the ratios. Appropriate regression models may be of help in finding out the associations between ratios for a sample of companies as well as in setting out the statistical foundation for benchmarks. Paper points out that benchmarks should be founded on the statistical characteristics relevant for the groups of possibly homogenous companies.