The adjustment of financial ratios in the presence of soft budget restraints: Evidence from Bulgaria.

Abstract

This paper is the first to study the behaviour of financial ratios in a Central European country. Using the entire population of company accounts in Bulgaria we find that for the financial ratios we considered, adjustment towards an industry target takes place but is significantly lower than that for Western companies reported in earlier studies. We find the adjustment of financial ratios in Bulgaria to be slowest in those firms, characterised by Soft budget constraints, which is a widespread phenomenon in Central Europe. We also find that the speed of adjustment is not significantly different between quoted and unquoted Bulgarian firms. This could be explained by the virtual inexistence of equity markets.Financial ratios; Ratios; Industry; Markets;