Inter-industry financial ratio comparison with application to Japanese and Chinese firms

Abstract

The problem of inter-industry comparison of financial ratios of publicly traded Japanese and Chinese firms is addressed. This problem is very important because Japan and China have respectively the world's second and third largest economy, the trade volume between them is very large and many investors are searching for Japanese and Chinese investment opportunities. The most familiar methods for comparing financial ratios are MANOVA and MDA. When used for analyzing financial data, these methods have many shortcomings. We use an alternative method that does not require any stringent assumptions and that is particularly suitable for financial data because it is very robust against skewness and heavy tailness, takes into account the possible difference in variability as well as the dependence among the financial ratios. Recent data about the most familiar valuation ratios have been analyzed. It is found that industry sectors of Japanese firms are generally more different than those of Chinese firms. In general, with few exceptions, the difference between industry sectors is high. The most different financial ratio and the lest different one are respectively the price to sale ratio and the price to earnings ratio for both Chinese and Japanese firms.