Developing a fuzzy corporate performance rating system: a petrochemical industry case study

The surge of socioeconomic and environmental problems in the recent decades have exacted a clarion call for transitioning to more sustainable and responsible business practices. Developing multiple bottom line performance evaluation systems, in order to track the progress made, is at the fulcrum of such a transition. The purpose of this study is to design a triangular rating system for multiple bottom line performance evaluation using corporate governance, corporate social responsibility, and corporate financial performance ratings. Furthermore, using a case study approach, the framework is tested in a high impact industry i.e. Iranian petrochemical industry. The result of the analyses showed no significant relationship among the three dimensions of the rating system which mainly stemmed from the failure of the examined market in adopting responsible business practices. Moreover, sensitivity analyses were conducted to account for any discrepancies in the outcomes as a result of using fuzzy numbers and weighting vectors. The study makes two major contributions. Theoretically, it proposes a triangular framework for performance evaluation using key performance indicators. Empirically, it applies the framework to a set of cases from the petrochemical industry by employing two prominent multi-attribute decision making models using fuzzy sets. Finally, the study concludes that failing to integrate environmental, social, and governance measures into decision making processes, in brazen defiance of stakeholders' needs, is the main culprit of an unsustainable and irresponsible corporate environment.

Developing a Fuzzy Corporate Performance Rating System: A Petrochemical Industry Case Study

The Price-Earnings (P/E) ratio is a widely used measure of the expected performance of companies, and it has almost invariably been calculated as the ratio of the current share price to the previous year’s earnings. However, the P/E of a particular stock is partly determined by outside influences, such as the year in which it is measured, the size of the company, and the sector in which the company operates. Thus, the present paper is based on the examination of various parametric determinants of P/E ratio in the Indian capital market, and it is found that the results of multiple regression model based on standardized variables indicate that ‘variability in market price’ and ‘size of the company’ were the most important determinants industry-wise as well as in aggregate analysis.

Parametric Determinants of Price-Earnings Ratio in Indian Capital Markets

Financial evaluation is the part and parcel of the business performance evaluation and it is more tangibly discussed in the banking industry due to the central role that banks play in the supply and demand mechanisms of money and credit in the economic system.However, financial evaluation, by and large,has been confined to financial performance assessment. In this study, we present a tripartite framework for assessing and rating banks in accordance with their financial performance, financial strength and financial distress status using 33 criteria. We utilize entropy and TOPSIS methods respectively for weighting and rating of banks. We utilize data from ten commercial banks listed on Tehran Stock Exchange (TSE). The contributions of the study is two-fold. Firstly, we utilize diverse quantitative and qualitative factors to account for the financial performance, financial strength and financial distress positions of the banks which give new perspectives into the financial stability of the banks. Secondly, the proposedframework can be used extensively in the banking industry as well as other settings for short-term, medium-term and long-term evaluations.The result of the study shows that banks A10, A6 and A3 have averaged the best along all three ratings. KEYWORD Financial Performance, Financial Strength, TOPSIS, Rating, Banking. INTRODUCTION inancial stability evaluation is the fulcrum of the banks’ overall performance evaluation and its significance has been doubled since the failure of the banking system and the shattering of the creditors’ confidence due to the frailties in the banks’ governance structure and investors’ foci on *Corresponding Author: Amir HosseinRahdari E-mail: Ah.rahdari@modares.ac.ir Telephone Number: +98 9127197785 myopic short-term-oriented measures during the financial crisis.Financial industry is ranked as the third industry on Tehran Stock Exchange (TSE) based on market capitalization and banking is the most important sector of financial industry by taking 71% of the value of the industry [1]. While banks have outperform most of the other industries except for petrochemicals in the recent years, their financial ranking is based on a limited market-oriented model that cannot reflect their long-term financial viability. Furthermore, due the paucity of presence of local or International rating agencies in a number of developing countries including Iran, rating systems, frameworks and indices that enable researchers and professionals to evaluate financial performance of companies in a more effective and efficient manner are of great interest. Nonetheless, two precautions need to be taken. Firstly, the proposed rating systems should be both simple and applicable such that researcher and professionals can easily cultivate them using the available data. Secondly, it should be effective and can provide insightful information as to companies’ performance. There have been some efforts in evaluating the banks performance in Iran. For instance, Shaverdi used TOPSIS, VIKOR and ELECTRE and integrated them with BSC to evaluate the performance of three private banks. No significant difference was found between TOPSIS, VIKOR and ELECTRE rankings [2]. This study focuses on presenting a tripartite rating framework using Entropy-TOPSIS that evaluates financial performance, financial strength and financial distress using 33 criteria in the banking industry. The information required for such evaluation is publically available through financial statements and other reporting media. Our use of Piotroski’s construct is circumscribed to its criteria rather than its explanatory power and theoretical implications. Therefore, we use the appellation of financial distress rating for this construct.The rest of the paper is organized in the following manner. First, the chosen measures and the raison d'être behind their selection alongside the proposed tripartite financial rating framework will be explained. Then, the A Tripartite Financial Rating Framework for the Banking Industry: Financial Performance, Strength and Distress Rating Amir HosseinRahdari 1, *, Armin Vojoudi Nobakht 2 and Omid EsmailPour 3 1 Tarbiat Modares University, Tehran, Iran 2 AllamehTabatabaiUniversity, Tehran, Iran Islamic Azad University, Science and Research Branch, Qom, Iran

Rahdari Amir Hossein

Papers

A tripartite financial rating framework for the banking industry: financial performance, strength and distress rating