Applying Chaid to identify the accounting-financial characteristics of the most profitable real estate companies in Spain/Aplicacion del Chaid para identificar las caracteristicas economico-financieras de las empresas inmobiliarias mas rentables en espana.
| Autor | Rayo, Salvador |
| Cargo | Report |
INTRODUCTION
In the current marketplace, which is characterized by the financial crisis in the developed world, the consequences in Spain increased due to the crisis in the housing sector that had been an important contributor to Spain's economic growth. However, at present, it is yielding lower rates of profitability. The GDP in Spain is expected to contract by 3.3% in 2009 and 0.6% in 2010, down from 1.2% growth in 2008. A modest recovery will only begin during the second half of 2010, although there is a possibility that this will be delayed. This economic contraction has an important influence in the housing sector, illustrated for example with the last information published by the Bank of Spain that points out that the real estate assets of Spanish banks and saving banks were rising, at the end of March 2009, up to 20.541 million Euros, 2% more than the previous month and 10% more than one year before. The aim of this study is to determine and evaluate, from an empirical perspective, the accounting and financial features that could condition the financial profitability of companies in the real estate sector, identifying the performances that guarantee their permanency.
At a theoretical level, the DuPont Model establishes the relationships between financial profitability and a group of different variables and accounting ratios, such as asset turnover, sales margin or financial leverage. Firstly, the objective of this research is to perform an empirical contrast of this model by analyzing the relationships between the profitability and the accounting ratios, and extracting the most relevant explanatory variables of the profitability. Secondly, the paper aims at quantifying those relationships and their explanatory variables with the purpose of obtaining the patterns or profiles--that is to say, the combinations of economic-accounting features--of the most profitable companies in the housing sector.
The sample includes 5,484 Spanish real estate companies. Return on Equity (ROE) is used to measure the profitability as dependent variable. As explanatory variables the study uses various independent variables related to activity, turnover, financial equilibrium and investment structure, solvency and liquidity, most of them defined in the DuPont Model.
This work begins with a review of the main empirical studies, which have analyzed the relationships between financial profitability and different accounting ratios. Next, we outline our methodological proposal to achieve the aims. To that effect, we illustrate the DuPont Model that is used as a reference, describing the sample and the variables, and finally explaining the analysis technique that is applied. Subsequently, the main results of the analysis are exhibited: in the first place by means of a descriptive and exploratory analysis, and later from an explanatory point of view. Finally, the paper illustrates the most relevant discussions on this research.
REVIEW OF EMPIRICAL EVIDENCE
The importance of the profitability as an essential factor for the long-term survival of the companies has motivated the appearance of a high number of empirical works to evaluate the profitability of the Spanish companies, particularly real estate firms, fundamentally from a descriptive point of view. The review of the empiric literature shows the existence of two research subjects: one with a descriptive character, the other with an explanatory nature.
In papers of research subjects of descriptive character, we can distinguish two groups: (a) those referring to the whole of the Spanish firms, and (b) those analyzing particular branches of the Spanish economy or related to a specific geographic area. Within the first group, the following works stand up: Maroto (1993; 1998), Rodriguez (1989), Bueno et al. (1990), Huergo (1992), Lucas & Gonzalez (1993), Sanchez (1994), and Gonzalez & Correa (1999). Also, at an institutional level, several organizations issue reports, such as the Research Service of the Mayor Council of Chambers of Commerce of Spain. The council periodically publishes reports about the situation of Spanish companies, such as the study about the profitability of the Spanish firms during the period 2000-2004 (Lizcano, 2004) or the financial report for the year 2006 (www.camaras.org). In the same descriptive vein, albeit by sectors, some works have studied the profitability of Spanish companies, such as firms in the automobile industry (Rodriguez, 2002). Specifically to the real estate sector, many associations of realtor firms, institutions (1) and banks publish annual reports on the evolution of the sector and its perspectives. Also, many authors, such as Bermudez (2008) and Ferruz (2007), have studied the situation and the main characteristics of the housing sector, with analysis of strengths and weaknesses. However, in general, all these descriptive studies use a traditional methodology, focused fundamentally on the analysis univariable of ratios, applying it on account information too much aggregated, which is obtained from the database of the Statement Central of the Spanish Central Bank. This information introduces problems of representativeness of the Spanish entrepreneurial environment, made explicit by the prevalence of big companies; this approach runs into trouble with the analyses and conclusions from those studies.
With regard to papers with explanatory nature, we have found various documents that make use of statistical techniques of multivariate analysis from an empirical perspective: Farinas & Rodriguez (1986), Aguilar (1989), Anton, Cuadrado & Rodriguez (1990), Fernandez & Garcia (1991), and Gonzalez (1997). The analysis of these works suggests that size has been the variable which has received a bigger attention from the researchers of profitability. Nevertheless, it is not possible to establish a clear relationship between both variables, since the conclusions from those studies are heterogeneous. Thus, some papers indicate a positive relationship between size and profitability (Galve & Salas, 1993; Gonzalez, 1997). However, other authors show the existence of a negative relationship, confirming the results obtained through the traditional methodology, as proved by Huergo (1992), Farinas (1992), Maroto (1993, 1998), Salas (1994) and Illueca (1996), who point out that small and medium companies get higher financial and economic profitability. On the other hand, the studies of Suarez (1977), Rodriguez (1989) and Galan (1997) suggest that size is not a significant variable to explain the profitability of companies.
The principal limitations of these explanatory studies are fundamentally consequence of three aspects: (a) the difficulties in obtaining a significant sample of companies that brings consistency to the results, mainly in the real estate sector; (b) the biggest complexity that implies the application of the multivariate statistic techniques and the interpretation of their results; (c) the absence of normality in the distributions of the ratios, which limits the validity of some statistic techniques and reduces the explanatory capacity. This research tries to contribute, by means of the empiric analysis, to improve the knowledge of the economic and financial characteristics that determine the profitability of the Spanish companies in the housing sector.
Our main contributions are of methodological nature. In the first place, our study focuses on the real estate sector using a sample of companies. We try to get over the problems other works show by using disaggregated account information (for each firm), with an appropriate representativeness by size, and by jointly analyzing a sufficient number of variables and ratios that can explain financial profitability. In the second place, the analysis applies statistics tools which do not require initial hypothesis on the distribution of the variables (showing greater adjustment to the characteristics of the account information). We have applied data mining techniques of classification and regression tree based on rule induction algorithms such as CHAID.
METHODOLOGICAL PROPOSAL
The following section outlines the methodological scheme we propose to achieve the aims. In this section, we show the DuPont Model, which is used as a reference to verify them; we describe the sample and the variables, and finally we explain the analysis techniques that are applied.
Theoretical model: financial profitability
The study of the profitability is usually carried out at two levels: economic profitability and financial profitability; their relationship comes to be defined by the financial leverage.
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Economic profitability (ROA = Return on Assets)
The Economic profitability (ROA) is a measure of the capacity of the assets to generate worth with independence of how they have been financed. It is usually obtained as follows (2):
ROA = Earnings Before Interest and Taxes (EBIT) or Operating Profit Loss/ Total Average Assets (TA)
ROA may be decomposed into return on sales multiplied by asset turnover:
ROA = EBIT/TA = EBIT/Sales x Sales/TA = Return on Sales x Asset Turnover
Return on sales represents the profit obtained for each sold monetary unit, that is, the profitability of the sales. The components of return on sales can be analyze through the decomposition into costs of goods sold, depreciation and cost of employees.
Asset turnover measures a firm's efficiency at using its assets in generating sales. The amount of sales is generated for every monetary unit's worth of assets. It is calculated by dividing sales by total assets.
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Financial profitability (ROE = Return on Equity)
Financial profitability (ROE) is a measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested. It is defined as:
ROE = Net Profit (NP)/Average Shareholders Funds or Equity (E)
At a theoretical level, the DuPont Model was a method of performance measurement...
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