In this paper, we propose a Bayesian hierarchical model based on the partial adjustment model described by Wu and Ho (Rev. Quant. Finance Ace. 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 Qffice (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. (C) 2002 Elsevier Science Ltd. All rights reserved.
