Financial Ratio Cross-section Dynamics: a Non-parametric Approach

This study introduces a non-parametric approach to study the cross-sectional dynamic behaviour of financial ratios and to test their convergence. A non-parametric Markov transition matrix approach is used to consider the evolution of the entire cross-section distribution. Conclusions with respect to the convergence of financial ratios are derived from the ergodic distributions. The results demonstrate high intra-distribution mobility with more persistence in the smallest and the largest size classes. Furthermore we find no convergence towards the industry average.