Olga Fullana, David Toscano



On the Use of Aggregate Book-To-Market Ratios

pdf PDF


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.


Arithmetic mean of ratios; balance-sheet conservatism; financial research; IFRS adoption; marketbased; accounting research; ratio of the arithmetic means; unconditional conservatism


[1] CALLAO, S., JARNE, J.I. and LAÍNEZ, J.A. (2007). Adoption of IFRS in Spain: effect on the comparability and relevance of financial reporting”. Journal of International Accounting, Auditing and Taxation, 16, 148- 178.

[2] CALLAO, S., FERRER, C., JARNE, J.I. and LAÍNEZ, J.A. (2010). IFRS adoption in Spain and the United Kingdom: Effects on accounting numbers and relevance. Advances in Accounting, 26(2), 304-313.

[3] FELTHAM, G.A. and OHLSON, J.A. (1995). Valuation and clean surplus accounting for operating and financial activities Contemporary accounting research, 11(2), 689-731.

[4] FERREIRA, L., GARCÍA, J.M. and GONÇALVES, T. (2007). Accounting conservatism in Portugal: Similarities and differences facing Germany and the United Kingdom. Revista de Administração Contemporânea, 11(SPE2), 163-188.

[5] FLEMING, P.J. and WALLACE, J.J. (1986). How not to lie with statistics: the correct way to summarize benchmark results. Communications of the ACM, 29(3), 218-221.

[6] GARCIA, J.M. and MORA, A. (2004). Balance Sheet versus Earnings Conservatism in Europe. European Accounting Review, 13(2), 261–292.

[7] GARRIDO, P. and VAZQUEZ, P.J. (2011). The transition to international financial reporting standards in Spain: relevance and timeliness of adjustments. International Journal of Accounting, Auditing and Performance Evaluation, 7(4), 287-302.

[8] GIVOLY, D. and HAYN, C. (2000). The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative? Journal of Accounting and Economics, 29, 287-320.

[9] ÍÑIGUEZ, R., POVEDA, F. and VÁZQUEZ, P.J. (2013). The effect of IFRS adoption on balance-sheet conservatism: the Spanish case. Spanish Journal of Finance and Accounting, 42(160), 453-486.

[10] KHALIFA, M., OTHMAN, H.B. and HUSSAINEY, K. (2016). Temporal variation and cross-sectional differences of accounting conservatism in emerging countries. International Journal of Accounting, Auditing and Performance Evaluation, 12(1), 45-69.

[11]LAI, C., LU, M., and SHAN, Y. (2013). Has Australian financial reporting become more conservative over time? Accounting & Finance, 53(3), 731-761.

[12] SMITH, J.E. (1988). Characterizing computer performance with a single number. Communications of the ACM, 31(10), 1202- 1206.

[13] STOBER, T. (1998). Do Prices Behave as if Accounting is Conservative?: Cross Sectional Evidence from the Feltham and Ohlson Valuation Model. Working paper, University of Notre Dame. South Bend, IN.

Cite this paper

Olga Fullana, David Toscano. (2016) On the Use of Aggregate Book-To-Market Ratios. International Journal of Economics and Management Systems, 1, 144-152


Copyright © 2017 Author(s) retain the copyright of this article.
This article is published under the terms of the Creative Commons Attribution License 4.0