Compromise programming calibration for financial analysis of firms of a common sector of business, case study for a set of Spanish banks in 1995

Jose Anton, Juan Grau and Elena Sanchez

Applied Financial Economics, 2007, vol. 17, issue 6, pages 445-461

Abstract: To perform a Financial Analysis (FA) procedure on a set of different firms of the same business sector and region or stock market (maybe with a definite management goal) a set from 7 to 20 balance ratios is chosen as representative of the firms situation, and a benchmark set of good firms of the same kind is selected to calibrate the ratios as attribute variables using Compromise Programming (CP) comparison procedures. For that using the ratios of the benchmark set a reference CP ideal point is obtained, and with it for each ratio a reduced Ratio Quality Index (RQI) is obtained containing a relative CP quality evaluation. From these RQI, a CP Global Utility Index (GUI) of each firm is then proposed, using a common set of chosen CP weights to incorporate the effect of each ratio on the quality of the firms for the intended FA study, with indication of some special techniques including possible use of utility-like functions. An illustrative case study follows with normalized balance sheets data of some main Spanish banks in 1995, showing that some of the real features of this suggestive example are put in evidence by this method, that quality classification depends on various factors, and that external wide information is necessary and gets incorporated with the proposed method. A discussion follows concerning the case, the method and possible future developments.

Date: 2007
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