Multivariate partial adjustment of financial ratios: a Bayesian hierarchical approach

Jose Luis Gallizo, Pilar Gargallo and Manuel Salvador
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Jose Luis Gallizo: Department of Business Administration, Faculty of Economics, University of Lleida, Spain, Postal: Department of Business Administration, Faculty of Economics, University of Lleida, Spain
Pilar Gargallo: Department of Statistical Methods, Faculty of Economics and Business Studies, University of Zaragoza, Spain, Postal: Department of Statistical Methods, Faculty of Economics and Business Studies, University of Zaragoza, Spain
Manuel Salvador: Department of Statistical Methods, Faculty of Economics and Business Studies, University of Zaragoza, Spain, Postal: Department of Statistical Methods, Faculty of Economics and Business Studies, University of Zaragoza, Spain

Journal of Applied Econometrics, 2008, vol. 23, issue 1, pages 43-64

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.

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