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Operational Efficiency and the Value-Relevance of Earnings

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Author Info
Fatma Cebenoyan () (Department of Economics, Hunter College)

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Abstract

This paper extends prior valuation literature by offering a new dimension to the economic analysis of differential earnings/price behavior. Specifically, a measure of firm performance, estimated using stochastic frontier methodology, is introduced to reexamine this relation. Results provide strong evidence that this efficiency measure explains some of the differences in value-relevance of earnings. The results are robust to functional forms, portfolio choices, timing differences, as well as to the inclusion of other explanatory variables such as risk, profitability, size and R&D. Finally, the possible link between efficiency and persistence is tested by evaluating the firms grouped based on their efficiency scores. The results indicate a significant relationship between the firms’ relative operational efficiency and earnings persistence.

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Paper provided by Hunter College: Department of Economics in its series Hunter College Department of Economics Working Papers with number 301.

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Date of creation: 2003
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Handle: RePEc:htr:hcecon:301

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  6. Christie, Andrew A., 1987. "On cross-sectional analysis in accounting research," Journal of Accounting and Economics, Elsevier, vol. 9(3), pages 231-258, December. [Downloadable!] (restricted)
  7. Jondrow, James & Knox Lovell, C. A. & Materov, Ivan S. & Schmidt, Peter, 1982. "On the estimation of technical inefficiency in the stochastic frontier production function model," Journal of Econometrics, Elsevier, vol. 19(2-3), pages 233-238, August. [Downloadable!] (restricted)
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  10. Martin, Stephen, 1988. "Market Power and/or Efficiency?," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 331-35, May. [Downloadable!] (restricted)
  11. Battese, George E. & Coelli, Tim J., 1988. "Prediction of firm-level technical efficiencies with a generalized frontier production function and panel data," Journal of Econometrics, Elsevier, vol. 38(3), pages 387-399, July. [Downloadable!] (restricted)
  12. Christensen, Laurits R & Jorgenson, Dale W & Lau, Lawrence J, 1973. "Transcendental Logarithmic Production Frontiers," The Review of Economics and Statistics, MIT Press, vol. 55(1), pages 28-45, February. [Downloadable!] (restricted)
  13. Dopuch, Nicholas & Gupta, Mahendra, 1997. "Estimation of benchmark performance standards: An application to public school expenditures," Journal of Accounting and Economics, Elsevier, vol. 23(2), pages 141-161, July. [Downloadable!] (restricted)
  14. Kothari, S. P. & Zimmerman, Jerold L., 1995. "Price and return models," Journal of Accounting and Economics, Elsevier, vol. 20(2), pages 155-192, September. [Downloadable!] (restricted)
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