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Financial Soundness Index for the Private Corporate Sector in Colombia

Author

Listed:
  • Juan S. Lemus-Esquivel

    (Banco de la República de Colombia)

  • Carlos A. Quicazán-Morenoy

    (Banco de la República de Colombia)

  • Jorge L. Hurtado-Guarínz

    (Banco de la República de Colombia)

  • Angélica Lizarazo-Cuéllarx

    (Banco de la República de Colombia)

Abstract

This paper evaluates the importance of building 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 fiancial soundness index, is derived by employing the crosssection 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, validation tests on the index confirm the apparent relationship between accounting data of private firms that are debtors of the Colombian financial system and the credit risk perception of and materialization for financial intermediaries.

Suggested Citation

  • Juan S. Lemus-Esquivel & Carlos A. Quicazán-Morenoy & Jorge L. Hurtado-Guarínz & Angélica Lizarazo-Cuéllarx, 2015. "Financial Soundness Index for the Private Corporate Sector in Colombia," IHEID Working Papers 08-2015, Economics Section, The Graduate Institute of International Studies.
    • Handle: RePEc:gii:giihei:heidwp08-2015
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    References listed on IDEAS

    as
    1. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588, December.
    2. Lennox, Clive, 1999. "Identifying failing companies: a re-evaluation of the logit, probit and DA approaches," Journal of Economics and Business, Elsevier, vol. 51(4), pages 347-364, July.
    3. Blix Grimaldi, Marianna, 2010. "Detecting and interpreting financial stress in the euro area," Working Paper Series 1214, European Central Bank.
    4. Miguel Morales & Dairo Estrada, 2010. "A financial stability index for Colombia," Annals of Finance, Springer, vol. 6(4), pages 555-581, October.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Frms' 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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