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U.S. and Japanese Electronic and Electrical Equipment Manufacturing Firms: A Comparison 298 world's other markets. Knowing how the financial characteristics of U.S. firms and Japanese firms compare would be helpful to corporate managers in managerial decision making. Financial ratios can be a useful tool in determining the financial strengths and weaknesses of firms. This study compares the financial characteristics of U.S. and Japanese electronic and electrical equipment manufacturing firms with eight widely used financial ratios. U.S. investors have substantial portfolio investments in the Japanese stock market. During the last ten years, the amount of U.S. stock investments in Japan has increased from $71.7 billion in 1994 to $214 billion in 2004. Knowing how the financial characteristics of U.S. firms and Japanese firms compare would be helpful in global investment decision making. This study provides useful information to global investors about the comparative financial characteristics of U.S. and Japanese electronic and electrical equipment manufacturing firms in terms of liquidity, asset management, financial leverage, profitability, and risk. 2. Data and Methodology The data for the study were drawn from the DISCLOSURE database in July 2006. The research sample includes 203 U.S. firms and 135 Japanese firms from the electronic and electrical equipment manufacturing industry (SIC 36) with no missing financial information for the December 31, 2001- December 31, 2005 period. A study by Brown, Soybel, and Stickney (1993) concludes that alternative accounting principles do not seriously distort the comparability of U.S. and Japanese financial statement data. The financial characteristics of U.S. and Japanese firms are compared by using eight well-known financial ratios. Financial ratio values may fluctuate from one year to the next. Financial ratios computed with data for a single year may be influenced by some temporary unusual circumstances occurring in that year and may not represent the true long-term financial characteristics of firms. Therefore, financial ratios used in this study are 5-year averages for the December 31, 2001-December 31, 2005 period computed with data from the year-end financial statements of the firms. The financial ratios used in the comparisons are presented in Table 1. Using financial ratios to compare the financial characteristics of different groups of firms has long been a widely used research methodology in finance. A number of studies use financial ratios to compare the financial characteristics of bankrupt and non-bankrupt firms [see, e.g., Altman (1968) and Deakin (1972)]. Some studies use financial ratios to compare the financial characteristics of firms which have been take-over targets with the financial characteristics of firms which have not been takeover targets [see, e.g., Rege (1984) and Meric, Leveen, and Meric (1991)]. A study compares the financial characteristics of UK listed and unlisted companies [see: Hutchinson, Meric, and Meric (1988)]. Multiple Discriminant Analysis (MDA) and Multivariate Analysis of Variance (MANOVA) are the two multivariate statistical techniques most widely used in previous studies to compare the financial characteristics of different groups of firms with financial ratios. The MANOVA technique is used in this study to compare the financial characteristics of U.S. and Japanese electronic and electrical equipment manufacturing firms.
299 Ilhan Meric, Charles W. McCall and Gulser Meric Table 1: Financial Ratios Used in the Study Financial Ratio Name Financial Ratio Definition* Liquidity Current Ratio (CUR) Current Assets/Current Liabilities Quick Ratio (QUR) (Current Assets - Inventories)/Current Liabilities Turnover Inventory Turnover (ITR) Sales/Inventory Total Assets Turnover (TAT) Sales/Total Assets Financial Leverage Equity Ratio (EQR) Common Equity/Total Assets Profitability Net Profit Margin (NPM) Net Income/Sales Return on Assets (ROA) Net Income/Total Assets Return on Equity (ROE) Net Income/Common Equity *All financial ratios are five-year averages for the December 31, 2001-December 31, 2005 period. 3. Multivariate Analysis of Variance (MANOVA) The MANOVA test statistics are presented in Table 2. The multivariate F-value is 16.115, which is significant at the one-percent level. This indicates that the overall financial characteristics of U.S. and Japanese electronic and electrical equipment manufacturing firms, as measured by the eight financial ratios used in the study, are significantly different. The univariate F-values show that the differences between the financial characteristics of the firms in the two countries are statistically significant at the one percent level in terms of the Current Ratio (CUR), Quick Ratio (QUR), Inventory Turnover (ITR), Total Assets Turnover (TAT), and Equity Ratio (EQR). However, the differences are not statistically significant in terms of the Net Profit Margin (NPM), Return on Assets (ROA), and Return on Equity (ROE). Both liquidity ratios are significantly higher in U.S. firms than in Japanese firms. U.S. firms have more liquidity compared with Japanese firms. Liquidity measures a firm’s ability to meet its short-term obligations. Therefore, a high liquidity level reduces the firm’s risk of not being able to meet its maturing obligations (e.g., interest payments on debt). However, if the liquidity level is too high, it can adversely affect the firm’s profitability. Inventory Turnover (ITR) is significantly higher in U.S. firms than in Japanese firms. However, Total Assets Turnover (TAT) is significantly higher in Japanese firms than in U.S. firms.
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