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Multivariate partial adjustment of financial ratios: a Bayesian hierarchical approach

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Author Info
Jose Luis Gallizo (Department of Business Administration, Faculty of Economics, University of Lleida, Spain)
Pilar Gargallo (Department of Statistical Methods, Faculty of Economics and Business Studies, University of Zaragoza, Spain)
Manuel Salvador (Department of Statistical Methods, Faculty of Economics and Business Studies, University of Zaragoza, Spain)
Abstract

In this paper we propose a multivariate extension of the partial adjustment model of financial ratios. To that end, we use a dynamic factor model which assumes that financial ratios measuring, essentially, the same economic-financial dimension of the firm evolve in a similar way, reflecting the evolution of the common factor. The proposed model is hierarchical with three levels. The first describes the relationship between each ratio and its common factor; the second describes the evolution of the common factors over time by means of Lev's (1969) partial adjustment model; and the third analyzes the similarity of firms' adjustment coefficients, taking into account their characteristics. The methodology is applied to the analysis of a set of financial ratios related to the business and financial structure of the firm. Copyright © 2008 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/jae.966
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File URL: http://qed.econ.queensu.ca:80/jae/2008-v23.1/
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Publisher Info
Article provided by John Wiley & Sons, Ltd. in its journal Journal of Applied Econometrics.

Volume (Year): 23 (2008)
Issue (Month): 1 ()
Pages: 43-64
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Handle: RePEc:jae:japmet:v:23:y:2008:i:1:p:43-64

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  1. Peles, Yoram C & Schneller, Meir I, 1989. "The Duration of the Adjustment Process of Financial Ratios," The Review of Economics and Statistics, MIT Press, vol. 71(3), pages 527-32, August. [Downloadable!] (restricted)
  2. Wu, Chunchi & Ho, Shih-Jen Kathy, 1997. " Financial Ratio Adjustment: Industry-Wide Effects or Strategic Management," Review of Quantitative Finance and Accounting, Springer, vol. 9(1), pages 71-88, July. [Downloadable!] (restricted)
  3. Gallizo, José Luis & Jiménez, Fernando & Salvador, Manuel, 2002. "Adjusting financial ratios: a Bayesian analysis of the Spanish manufacturing sector," Omega, Elsevier, vol. 30(3), pages 185-195, June. [Downloadable!] (restricted)
  4. Christos Ioannidis & David A. Peel & Michael J. Peel, 2003. "The Time Series Properties of Financial Ratios: Lev Revisited," Journal of Business Finance & Accounting, Blackwell Publishing, vol. 30(5-6), pages 699-714. [Downloadable!] (restricted)
  5. Petersen, Mitchell A & Rajan, Raghuram G, 1994. " The Benefits of Lending Relationships: Evidence from Small Business Data," Journal of Finance, American Finance Association, vol. 49(1), pages 3-37, March. [Downloadable!] (restricted)
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