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Operational Efficiency and the Value-Relevance of Earnings

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  • Fatma Cebenoyan

    ()
    (Department of Economics, Hunter College)

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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File URL: http://econ.hunter.cuny.edu/wp-content/uploads/sites/6/RePEc/papers/HunterEconWP301.pdf
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Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 301.

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

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  1. Collins, Daniel W. & Kothari, S. P., 1989. "An analysis of intertemporal and cross-sectional determinants of earnings response coefficients," Journal of Accounting and Economics, Elsevier, vol. 11(2-3), pages 143-181, July.
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  5. Banker, Rajiv D. & Chang, Hsihui & Cunningham, Reba, 2003. "The public accounting industry production function," Journal of Accounting and Economics, Elsevier, vol. 35(2), pages 255-281, June.
  6. Lev, Baruch, 1983. "Some economic determinants of time-series properties of earnings," Journal of Accounting and Economics, Elsevier, vol. 5(1), pages 31-48, April.
  7. 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.
  8. Ou, Jane A. & Penman, Stephen H., 1989. "Financial statement analysis and the prediction of stock returns," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 295-329, November.
  9. 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.
  10. Barth, Mary E. & Beaver, William H. & Landsman, Wayne R., 1992. "The market valuation implications of net periodic pension cost components," Journal of Accounting and Economics, Elsevier, vol. 15(1), pages 27-62, March.
  11. Mester, Loretta J., 1996. "A study of bank efficiency taking into account risk-preferences," Journal of Banking & Finance, Elsevier, vol. 20(6), pages 1025-1045, July.
  12. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
  13. Kormendi, Roger & Lipe, Robert, 1987. "Earnings Innovations, Earnings Persistence, and Stock Returns," The Journal of Business, University of Chicago Press, vol. 60(3), pages 323-45, July.
  14. 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.
  15. Martin, Stephen, 1988. "Market Power and/or Efficiency?," The Review of Economics and Statistics, MIT Press, vol. 70(2), pages 331-35, May.
  16. 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.
  17. Christie, Andrew A., 1987. "On cross-sectional analysis in accounting research," Journal of Accounting and Economics, Elsevier, vol. 9(3), pages 231-258, December.
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