Analyzing long-term average adjustment of financial ratios with spatial interactions

The aim of this paper is to put forward a beta convergence model using spatial interaction to evaluate the dynamics of financial ratios. We overcome some of the limitations that come from the traditional partial adjustment model by relating both models. We show that the parameters of the two models may be connected. As an example, we discuss the case of a large sample of medium to high-tech industrial small and medium enterprises (SMEs) located along the Spanish Mediterranean coast. Our findings support the existence of a long-term average adjustment process in the financial ratios of this set of companies which depends on the characteristics of the firms in their neighborhood.