Researchers often form ratios of variables to measure firm characteristics, but which ratios create the most powerful tests? For example, if we use ratios of book value of equity (BE) and market value of equity (ME), or earnings (E) and price (P), does it matter which variable appears in the denominator? Any variable in the denominator, when close to zero, creates outliers and is less likely to produce effective tests. Our tests, using data from 1972 to 2008, indicate the choice between reciprocals often produces significantly different outcomes. While ME/BE is a more commonly used control variable than BE/ME or LN(BE/ME), we find the latter two produce better results, even if the data are trimmed to mitigate the outlier problem. Similarly, using E/P generally produces better results than P/E, and while ratios with book value of assets (BA) in the numerator work better than those with it in the denominator, the difference is less pronounced than when BE or E is part of the ratio. While the focus of our empirical findings is on growth measures, the principal applies anytime a ratio has a denominator that is frequently near zero.

We examine the statistical error and efficiency associated with two commonly used event-study techniques when applied to samples of various sizes. Previous research has established that the frequently used Patell (1976) test is not well specified when the event itself creates additional return variance. We find that even under ideal conditions when the event creates no additional variance, the Patell test rejects a true null hypothesis substantially more often than the stated significance level. In contrast, the alternate test of Boehmer et al. (1991) performs well in samples of all sizes and under all conditions we consider.