Financial Soundness Index for the Private Corporate Sector in Colombia

Juan S. Lemus-Esquivel (), Carlos A. Quicazán-Morenoy (), Jorge L. Hurtado-Guarínz () and Angélica Lizarazo-Cuéllarx ()
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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

No 08-2015, IHEID Working Papers from Economics Section, The Graduate Institute of International Studies

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.

Keywords: Frms' financial soundness; principal component analysis; financial ratios; composite indices; financial stability (search for similar items in EconPapers)
JEL-codes: C3 G30 G32 L25 (search for similar items in EconPapers)
Pages: 23 pages
Date: 2015-03-15
New Economics Papers: this item is included in nep-acc and nep-rmg
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