Efficiency and profitability: a panel data analysis of UK manufacturing firms, 1993-2007
AbstractThis paper examines the impact of efficiency on profitability using a panel of 11728 UK manufacturing firms for the period 1993-2007. A key contribution is estimation of the relationship between firm efficiency and profitability in a new way. Part of this novelty involves direct estimation of firm efficiency using a stochastic frontier method rather than inferences being made about the impact of efficiency based on anticipated firm and market behaviour. Two key aspects of the discussion are (1) the shape of the relationship between efficiency and profitability and (2) the way in which this changes in the short and long runs. A simple theoretical model is developed that predicts a 4th order polynomial for efficiency on the right hand side of a profit equation in levels. This model also predicts short-run and long-run impacts that can involve a switching in the sign of the impact of efficiency. Estimation of this model suggests a threshold effect of efficiency on profitability. Below the threshold efficiency has effectively no effect on profitability, but above the threshold the impact is positive in the short-run but negative in the long-run. This switching is consistent with theoretical expectations.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by The University of Sheffield, Department of Economics in its series Working Papers with number 2010003.
Length: 46 pages
Date of creation: Jan 2010
Date of revision: Jan 2010
Firm efficiency; Firm profitability; Stochastic frontier analysis; UK manufacturing firms;
Find related papers by JEL classification:
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
- D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
- L60 - Industrial Organization - - Industry Studies: Manufacturing - - - General
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Georgios Efthyvoulou).
If references are entirely missing, you can add them using this form.