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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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Bibliographic 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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References

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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.
  2. Christos Ioannidis & David A. Peel & Michael J. Peel, 2003. "The Time Series Properties of Financial Ratios: Lev Revisited," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 30(5-6), pages 699-714.
  3. Gallizo, Jose L. & Salvador, Manuel, 2003. "Understanding the behavior of financial ratios: the adjustment process," Journal of Economics and Business, Elsevier, vol. 55(3), pages 267-283.
  4. Serrano Cinca, C. & Mar Molinero, C. & Gallizo Larraz, J.L., 2005. "Country and size effects in financial ratios: A European perspective," Global Finance Journal, Elsevier, vol. 16(1), pages 26-47, August.
  5. 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.
  6. 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.
  7. 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.
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Cited by:
  1. Mate-Sanchez, Mariluz & López Hernández, Fernando A. & Lacambra, Jesus Mur, 2012. "Analyzing long-term average adjustment of financial ratios with spatial interactions," Economic Modelling, Elsevier, vol. 29(4), pages 1370-1376.

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