On the Use of Aggregate Book-To-Market Ratios

Abstract: In the financial and market-based accounting research, the analysis of the consequences on the findings of using the arithmetic mean to summarize ratios has received little attention. In this paper we show how the use of this wrong procedure can lead to infer mistaken conclusions from the empirical results achieved. To do it, we conduct a market-based accounting research that uses aggregate ratios by country. The analysis of the evolution of balance-sheet accounting conservatism, using aggregate measures of the firm-specific Book-to- Market ratios, allows us to show the different patterns that alternative specifications of the aggregate measure have. Additionally, the analysis of the effect of mandatory first application of the International Financial Reporting Standards on the balance-sheet conservatism allows us to show how the use of the arithmetic mean to summarize Book-to-Market ratios can result in misleading conclusions.