Firm Characteristics, Relative Efficiency, and Equity Returns

Abstract

This study uses a stochastic frontier approach to evaluate firm efficiency. The resulting efficiency score, based on firm characteristics, is the input for performance evaluation. The portfolio composed of highly efficient firms significantly underperforms the portfolio composed of inefficient firms even after adjustment for firm characteristics and risk factors, suggesting a required premium for the inefficient firms. The difference in performance between the two portfolios remains for at least five years after the portfolio formation year. In addition, firm efficiency exhibits significant explanatory power for average equity returns in cross-sectional analysis.

Do Efficiency Ratios Help Investors to Explore Firm Performances? Evidence from Italian Listed Firms

“…Moreover, the other independent variables have an insignificant effect on stock market value, measured by proxies such as the Price to earnings ratio and the Market to sale ratio. In contrast to some published studies based on different firm samples and analysis methodologies (Frijns et al, 2012;Nguyen & Swanson, 2009;Soliman, 2008;Alan et al, 2014), financial ratios analysis showed that proxies of efficiency and stock market value are largely uncorrelated.…”

“…The issue was developed further by analyzing the portfolio composed of efficient firms and the portfolio of inefficient firms. Although research revealed that the most efficient firms seem to have higher risks than inefficient firms, unambiguous results emerged about the performance of portfolios over time (Nguyen & Swanson, 2009;Frijns, Margaritis, & Psillaki, 2012). The relationship between efficiency and firm performances, measured by various proxies and analysed with different approaches, has also been addressed by focusing on several specific issues such as agency costs in publicly held corporations (Habib & Ljunqvist, 2005), firm size (Halkos & Tzeremes, 2007), service quality (Talluri, Kim, & Schoenherr, 2013) and managerial ability (Demerjian, Lev, & McVay, 2012).…”

Insights Into Portuguese Stock Market Efficiency Using DEA

“…Notwithstanding, an extensive survey of the underlying models indicates that econometric techniques and empirical studies can be found in several scientific analysis (e.g. Habib & Ljungqvist, 2005;Pawlina & Renneboog, 2005;Amess & Girma, 2009;Nguyen & Swanson, 2009;Das & Kumbhakar, 2012;Muradoglu & Sivaprasad, 2013).…”

Portfolio performance gauging in discrete time using a Luenberger productivity indicator

“…The same idea has been employed in the context of asset selection, whereby changes in stock performance are related to changes in productive efficiency. Preliminary results suggest that changes in productive efficiency are at least partially translated into changes in stock prices (see, e.g., Edirisinghe and Zhang (2007) or Nguyen and Swanson (2009) for recent developments).…”