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Firm efficiency and stock returns: Australian evidence

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  • Ang, Tze Chuan 'Chewie'
  • Azad, A.S.M. Sohel
  • Pham, Thu A.T.
  • Zhong, Angel

Abstract

We employ a stochastic frontier approach to estimate firm efficiency - the efficiency with which a firm converts its inputs into output. We find a negative relation between firm efficiency and the cross-section of stock returns (‘firm efficiency effect’) in the Australian stock market. The firm efficiency effect is robust after controlling for other firm characteristics and is more pronounced in stocks with high limits-to-arbitrage. However, we find no evidence that firm efficiency is a priced factor in the cross-section. Our findings suggest that investors misprice firm efficiency and arbitrage costs perpetuate its return predictability.

Suggested Citation

  • Ang, Tze Chuan 'Chewie' & Azad, A.S.M. Sohel & Pham, Thu A.T. & Zhong, Angel, 2021. "Firm efficiency and stock returns: Australian evidence," International Review of Financial Analysis, Elsevier, vol. 78(C).
    • Handle: RePEc:eee:finana:v:78:y:2021:i:c:s105752192100257x
    DOI: 10.1016/j.irfa.2021.101935
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