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Using accounting ratios to measure construction industry lag

Using accounting ratios to measure construction industry lag The apparent lag between macro-economic behavior and financial implications in the construction industry is yet to be examined. The purpose of this paper is to understand the nature of the lag and the relationship between economic changes from year-to-year and the impact on the financial status of construction companies.Design/methodology/approachCorrelation was made between US economic growth and construction industry financial indicators over a 28-year period. Cumulative per cent growth in US GDP was considered an independent variable, while nine financial ratios were calculated and considered dependent variables in this study.FindingsThe results of this study found that correlation improved when considering lag of two, three or sometimes four years after the economic event. Some financial ratios proved more sensitive than others, supporting the hypothesis of this study.Research limitations/implicationsThe practical application of this study for construction companies is to understand how the construction industry lag impacts financial behavior. It therefore informs managerial decisions related to solvency, liquidity, equity structure and managerial practices; all of which are measured by financial ratios.Practical implicationsThis study was intended to advance the research in this area and also to serve to strengthen industry members in their financial management of construction companies. Economic dynamics have long-lasting implications, which can be addressed through an increased focus on managing financial health.Originality/valueThough the lag is intuitively known and has been studied from market perspectives, there is a lack of empirical study evaluating the impact of lag on financial key performance indicators. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Management of Property and Construction Emerald Publishing

Using accounting ratios to measure construction industry lag

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Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
1366-4387
DOI
10.1108/jfmpc-11-2019-0085
Publisher site
See Article on Publisher Site

Abstract

The apparent lag between macro-economic behavior and financial implications in the construction industry is yet to be examined. The purpose of this paper is to understand the nature of the lag and the relationship between economic changes from year-to-year and the impact on the financial status of construction companies.Design/methodology/approachCorrelation was made between US economic growth and construction industry financial indicators over a 28-year period. Cumulative per cent growth in US GDP was considered an independent variable, while nine financial ratios were calculated and considered dependent variables in this study.FindingsThe results of this study found that correlation improved when considering lag of two, three or sometimes four years after the economic event. Some financial ratios proved more sensitive than others, supporting the hypothesis of this study.Research limitations/implicationsThe practical application of this study for construction companies is to understand how the construction industry lag impacts financial behavior. It therefore informs managerial decisions related to solvency, liquidity, equity structure and managerial practices; all of which are measured by financial ratios.Practical implicationsThis study was intended to advance the research in this area and also to serve to strengthen industry members in their financial management of construction companies. Economic dynamics have long-lasting implications, which can be addressed through an increased focus on managing financial health.Originality/valueThough the lag is intuitively known and has been studied from market perspectives, there is a lack of empirical study evaluating the impact of lag on financial key performance indicators.

Journal

Journal of Financial Management of Property and ConstructionEmerald Publishing

Published: Jul 27, 2021

Keywords: Accounting; Financial ratios; Construction economics and finance

References