Dynamic Analysis of the Effects of Profitability Ratio Shocks on Debt, Liquidity, Activity, and Market Ratios
Keywords:
PSVAR models, Directed Acyclic Graphs (DAG), profitability ratios, debt ratios, market ratios, liquidity ratios, activity ratiosAbstract
This article examines the dynamic interactions of corporate financial behaviors using a nine-variable Panel Structural Vector Autoregression (PSVAR) framework. The purpose of the study is to investigate the mutual and dynamic effects of profitability ratios on debt ratios, liquidity ratios, activity ratios, and market ratios. A total of 219 companies were selected during the years 2001–2024. To analyze the causal behavior of the model variables and to impose the restrictions required for applying the PSVAR model, Directed Acyclic Graphs (DAG) were used, and the causal relationships were extracted using Tetrad4 software. The results indicate that a ROE shock strongly reinforces itself in the early stages and also increases ROA. Moreover, when a ROE shock occurs, market value grows more than book value, and companies facing a positive ROE shock reduce their need for debt financing for up to five periods. In the long run, companies can use debt to generate growth, yet in the short run, emphasis should be placed on improving profitability ratios.
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Copyright (c) 2025 Hamta Bashirigoodarzi (Author); Alireza Ghiyasvand; Farid Sefaty, Mahmud Hematfar (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
