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Adjusting financial ratios: a Bayesian analysis of the Spanish manufacturing sector

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  • Gallizo, José Luis
  • Jiménez, Fernando
  • Salvador, Manuel

Abstract

In this paper, we propose a Bayesian hierarchical model based on the partial adjustment model described by Wu and Ho (Rev. Quant. Finance Acc. 9 (1997) 71). The proposed model allows us to estimate the average adjustment coefficients associated with the error correction component and with the sensitivity of the firm to exogenous factors that have an industry-wide effect. Using the proposed model, we analyse the financial ratios calculated by The Bank of Spain's Central Balance Sheet Office (CBSO) corresponding to the Spanish manufacturing sector during the period 1986-1997. In almost all the ratios analysed, we find that the error correction component exerts a greater influence, with the Interest Expense to Liabilities ratio demonstrating a greater sensitivity to this effect; by contrast, factors endogenous to the firm have more influence over the Indebtedness ratio. When considered by sectors, we find that it is the Transport sector which enjoys the greatest capacity for manoeuvre in the Profitability and Indebtedness ratios.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:jomega:v:30:y:2002:i:3:p:185-195
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    References listed on IDEAS

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    1. Lev, B, 1969. "Industry Averages As Targets For Financial Ratios," Journal of Accounting Research, Wiley Blackwell, vol. 7(2), pages 290-299.
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    4. Rajan, Raghuram G & Zingales, Luigi, 1995. "What Do We Know about Capital Structure? Some Evidence from International Data," Journal of Finance, American Finance Association, vol. 50(5), pages 1421-1460, December.
    5. 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.
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    Cited by:

    1. MOHAMMADI, Maryam & MALEK, Afagh, 2012. "An Empirical Study Of Financial Performance Evaluation Of A Malaysian Manufacturing Company," Academica Science Journal, Economica Series, Dimitrie Cantemir University, Faculty of Economical Science, vol. 1(1), pages 95-102, November.
    2. Jose Luis Gallizo & Pilar Gargallo & Manuel Salvador, 2008. "Multivariate partial adjustment of financial ratios: a Bayesian hierarchical approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 23(1), pages 43-64.

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