Advertisement

Journal of Productivity Analysis

, Volume 37, Issue 3, pp 295–306 | Cite as

Firm efficiency and stock returns

  • Bart FrijnsEmail author
  • Dimitris Margaritis
  • Maria Psillaki
Article

Abstract

In this paper, we investigate the role of firm efficiency in asset pricing using a sample of US publicly listed companies for the period 1988–2007. We employ non-parametric data envelopment analysis (DEA) on various input/output combinations, focusing on sales and market value as output measures in the construction of the frontier technologies. Using these performance measures, we examine whether efficient firms perform differently from inefficient firms following standard financial analysis procedures. First, we employ performance attribution regressions, by forming portfolios based on efficiency scores and tracking the performance of the various portfolios over time. Second, we perform cross-sectional/panel regressions to determine whether firm efficiency indeed has explanatory power for the cross-section of stock returns. Our results suggest that firm efficiency plays an important role in asset pricing and that efficient firms significantly outperform inefficient firms even after controlling for known risk factors.

Keywords

Asset pricing Firm efficiency Directional distance functions Data envelopment analysis 

JEL Classification

C61 G11 G12 

References

  1. Alam I, Sickles R (1998) The relationship between stock market returns and technical efficiency innovations: evidence from the US airline industry. J Prod Anal 9:35–51CrossRefGoogle Scholar
  2. Banz R (1981) The relationship between return and market value of common stocks. J Financ Econ 9:3–18CrossRefGoogle Scholar
  3. Black F (1972) Capital market equilibrium with restricted borrowing. J Bus 45:444–455CrossRefGoogle Scholar
  4. Carhart M (1997) On the persistence in mutual fund performance. J Finance 52:57–82Google Scholar
  5. Chambers R, Chung Y, Färe R (1996) Benefit and distance functions. J Econ Theory 70:407–419CrossRefGoogle Scholar
  6. Demerjian P, Lev B, McVay S (2009) Quantifying managerial ability: a new measure and validity tests. Working paperGoogle Scholar
  7. Easley D, Hvidkjaer S, O’Hara M (2002) Is information risk a determinant of asset returns? J Finance 57:2185–2221CrossRefGoogle Scholar
  8. Fama E, French K (1992) The cross-section of expected stock returns. J Finance 47:427–465CrossRefGoogle Scholar
  9. Fama E, French K (1993) Common risk factors in the returns on stocks and bonds. J Finance Econ 33:3–56CrossRefGoogle Scholar
  10. Habib M, Ljungqvist A (2005) Firm value and managerial incentives: a stochastic frontier approach. J Bus 78:2053–2093CrossRefGoogle Scholar
  11. Jegadeesh N, Titman S (1993) Returns to buying winners and selling losers: implications for stock market efficiency. J Finance 48:65–91CrossRefGoogle Scholar
  12. Leverty JT, Qian Y (2009) Do efficient firms make better acquisitions? Working paperGoogle Scholar
  13. Lintner J (1965) The valuation of risk assets and the selection of risky investments in stock portfolios and capital budgets. Rev Econ Stat 47:13–37CrossRefGoogle Scholar
  14. Markowitz H (1952) Portfolio selection. J Finance 7:77–91CrossRefGoogle Scholar
  15. Newey W, West K (1987) A simple positive semi-definite, heteroskedasticity and autocorrelation consistent covariance matrix. Econometrica 55:703–708CrossRefGoogle Scholar
  16. Nguyen G, Swanson P (2009) Firm characteristics, relative efficiency, and equity returns. J Financ Quant Anal 44:213–236CrossRefGoogle Scholar
  17. Pàstor L, Stambaugh R (2003) Liquidity risk and expected stock returns. J Polit Econ 111:642–685CrossRefGoogle Scholar
  18. Petersen M (2009) Estimating standard errors in finance panel data sets: comparing appraoches. Rev Financ Stud 22:435–480CrossRefGoogle Scholar
  19. Rosenberg B, Reid K, Lanstein R (1985) Persuasive evidence of market inefficiency. J Portfolio Manag 11:9–17CrossRefGoogle Scholar
  20. Sharpe W (1964) Capital asset prices: a theory of market equilibrium under conditions of risk. J Finance 19:425–442CrossRefGoogle Scholar
  21. Stattman D (1980) Book values and stock returns. Chic MBA J Sel Pap 4:25–45Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  • Bart Frijns
    • 1
    Email author
  • Dimitris Margaritis
    • 2
  • Maria Psillaki
    • 3
  1. 1.Department of FinanceAuckland University of TechnologyAucklandNew Zealand
  2. 2.Department of Accounting and FinanceUniversity of Auckland Business SchoolAucklandNew Zealand
  3. 3.Department of EconomicsUniversity of PiraeusPiraeusGreece

Personalised recommendations