A squared rank assessment of the difference between US and European firm valuation ratios

Financial ratios are useful in determining the financial strengths and weaknesses of firms. The most commonly used methods for comparing firms through financial ratios are multivariate analysis of variance (MANOVA) and multiple discriminant analysis (MDA). These methods have been very often used for inferential purposes when the underlying assumptions (e.g. random sampling, normality, homogeneity of variances...) are not met. A method for comparing firm financial ratios is proposed, it is based on squared ranks and does not require any particular assumption because it is a descriptive method. The proposed method is devised to explicitly consider the possible difference in variances and to take also into account the dependence among the financial ratios. It is robust against skewness and heavy tailness. This aspect is very important because usually financial ratios, even after removing outliers, are highly skewed and heavy tailed. An application for studying the difference between US and European firms is discussed.