The generalized association between financial statements and security characteristics

A strong relationship between the firm's financial ratios and its security characteristics is observed when canonical correlation analysis is applied, rather than attempts to measure the volatile relationships between the individual variables. It is seen from a sample of 32 firms for the period 1974-1984 that the key ratios in the relationship differ over time. Furthermore, it is observed that accrual-based ratios are related more significantly than cash-based ratios to the security characteristics. Cash-based ratios are incrementally significant, however. To establish a relationship between the financial ratios and the security characteristics a limited number of temporally varying key ratios is sufficient. Finally, it is observed that in assessing security characteristics the expected returns and beta are sufficient. Higher moments have no incremental significance.