The adjustment of financial ratios in the presence of soft budget constraints: evidence from Bulgaria

Jozef Gerard L Konings, Hylke Vandenbussche

Research output: Contribution to journalArticle

11 Citations (Scopus)

Abstract

This paper is the first to study the behaviour of financial ratios in an emerging economy of Central Europe. Using the entire population of company accounts in Bulgaria we find that for the financial ratios we considered, adjustment towards a target takes place but the speed of adjustment is lower than that for Western companies reported in earlier studies. Also, we find the adjustment of financial ratios in Bulgaria to be far slower in firms characterized by soft budget constraints, a widespread phenomenon in Central Europe. However, the speed of adjustment of most financial ratios shows up as significantly higher after the Bulgarian financial crisis in 1997. Our results indicate that the partial adjustment model may not be the most appropriate model for an emerging economy like Bulgaria. Further research needs to clarify how expectations are formed and financial ratios move over time in transition countries such as Bulgaria.

Original languageEnglish
Pages (from-to)131-159
Number of pages29
JournalEuropean Accounting Review
Volume13
Issue number1
DOIs
Publication statusPublished - Jan 1 2004

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ASJC Scopus subject areas

  • Accounting

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