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Financial Soundness Index for the Private Corporate Sector in Colombia

Author

Listed:
  • Juan S. Lemus-Esquivel
  • Carlos A. Quicazán-Moreno
  • Jorge L. Hurtado-Guarín
  • Angélica Lizarazo-Cuéllar

Abstract

This paper has as main objective to build a composite metric of financial soundness for the private corporate sector in Colombia. Instead of relying on the individual and sometimes restrictive financial ratio analysis approach, the purpose of this document is to provide a single metric aimed at measuring the financial health of firms. Said metric, the financial soundness index, is derived by employing the cross-section approach of principal component analysis. For the time period of 2000-2013, the results allow to identify which industries have a weak, strong or similar balance sheet performance relative to that observed for the private corporate sector as a whole. Furthermore for firms that are debtors of the Colombian financial system, validation tests on the index confirm the apparent relationship between accounting data and the credit risk perception of and materialization for financial intermediaries.Keywords:: firms’ financial soundness, principal component analysis, financial ratios, composite indices,financial stability.

Suggested Citation

  • Juan S. Lemus-Esquivel & Carlos A. Quicazán-Moreno & Jorge L. Hurtado-Guarín & Angélica Lizarazo-Cuéllar, 2015. "Financial Soundness Index for the Private Corporate Sector in Colombia," Temas de Estabilidad Financiera 82, Banco de la Republica de Colombia.
    • Handle: RePEc:bdr:temest:82
    DOI: 10.32468/tef.82
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    : firms’ financial soundness; principal component analysis; financial ratios; composite indices; financial stability.;
    All these keywords.

    JEL classification:

    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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