Multivariate partial adjustment of financial ratios: a Bayesian hierarchical approach

✍ Scribed by Jose Luis Gallizo; Pilar Gargallo; Manuel Salvador

• Publisher: John Wiley and Sons
• Year: 2008
• Tongue: English
• Weight: 175 KB
• Volume: 23
• Category: Article
• ISSN: 0883-7252
• DOI: 10.1002/jae.966

✦ Synopsis

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.