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A simple dimension reduction procedure for corporate finance composite indicators

In: Mathematical and Statistical Methods for Actuarial Sciences and Finance

Author

Listed:
  • Marco Marozzi

    (University of Calabria, Dipartimento di Economia e Statistica)

  • Luigi Santamaria

    (Cattolica University, Dipartimento di Scienze Statistiche)

Abstract

Financial ratios provide useful quantitative financial information to both investors and analysts so that they can rate a company. Many financial indicators from accounting books are taken into account. Instead of sequentially examining each ratio, one can analyse together different combinations of ratios in order to simultaneously take into account different aspects. This may be done by computing a composite indicator. The focus of the paper is on reducing the dimension of a composite indicator. A quick and compact solution is proposed, and a practical application to corporate finance is presented. In particular, the liquidity issue is addressed. The results suggest that analysts should take our method into consideration as it is much simpler than other dimension reduction methods such as principal component or factor analysis and is therefore much easier to be used in practice by non-statisticians (as financial analysts generally are). Moreover, the proposed method is always readily comprehended and requires milder assumptions.

Suggested Citation

  • Marco Marozzi & Luigi Santamaria, 2010. "A simple dimension reduction procedure for corporate finance composite indicators," Springer Books, in: Marco Corazza & Claudio Pizzi (ed.), Mathematical and Statistical Methods for Actuarial Sciences and Finance, pages 205-213, Springer.
    • Handle: RePEc:spr:sprchp:978-88-470-1481-7_21
    DOI: 10.1007/978-88-470-1481-7_21
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