A simple dimension reduction procedure for corporate finance composite indicators推荐.pdfVIP

A simple dimension reduction procedure for corporate finance composite indicators Marco Marozzi and Luigi Santamaria Abstract. Financial ratios provide useful quantitative financial information to both investors and analysts so that they can rate a company. Many financial indicators from accounting books are taken into account. Instead of sequentially examining each ratio, one can analyse together different combinations of ratios in order to simultaneously take into account different aspects. This may be done by computing a composite indicator. The focus of the paper is on reducing the dimension of a composite indicator. A quick and compact solution is proposed, and a practical application to corporate finance is presented. In particular, the liquidity issue is addressed.The results suggest that analysts should take our method into consideration as it is much simpler than other dimension reduction methods such as principal component or factor analysis and is therefore much easier to be used in practice by non-statisticians (as financial analysts generally are). Moreover, the proposed method is always readily comprehended and requires milder assumptions. Key words: dimension reduction, composite indicator, financial ratios, liquidity 1 Introduction Financial ratios provide useful quantitative financial information to both investors and analysts so that they can rate a company. Many financial indicators from accounting books are taken into account. In general, ratios measuring profitability, liquidity, solvency and efficiency are considered. Instead of sequentially examining each ratio, one can analyse different combina- tions of ratios together in order to simultaneously take into account different aspects. This can be done by computing a composite indicator. Complex variables can be measured by means of composite indicators. The basic idea is to break down a complex variable into components which are measurable by means