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Firm Characteristics, Relative Efficiency, and Equity Returns

Author

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  • Nguyen, Giao X.
  • Swanson, Peggy E.

Abstract

This study uses a stochastic frontier approach to evaluate firm efficiency. The resulting efficiency score, based on firm characteristics, is the input for performance evaluation. The portfolio composed of highly efficient firms significantly underperforms the portfolio composed of inefficient firms even after adjustment for firm characteristics and risk factors, suggesting a required premium for the inefficient firms. The difference in performance between the two portfolios remains for at least five years after the portfolio formation year. In addition, firm efficiency exhibits significant explanatory power for average equity returns in cross-sectional analysis.

Suggested Citation

  • Nguyen, Giao X. & Swanson, Peggy E., 2009. "Firm Characteristics, Relative Efficiency, and Equity Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(01), pages 213-236, February.
  • Handle: RePEc:cup:jfinqa:v:44:y:2009:i:01:p:213-236_09
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    Cited by:

    1. Brandouy, Olivier & Briec, Walter & Kerstens, Kristiaan & Van de Woestyne, Ignace, 2010. "Portfolio performance gauging in discrete time using a Luenberger productivity indicator," Journal of Banking & Finance, Elsevier, vol. 34(8), pages 1899-1910, August.
    2. Bazdresch, Santiago, 2011. "Product differentiation and systematic risk: theory and empirical evidence," MPRA Paper 35504, University Library of Munich, Germany, revised 01 Nov 2011.
    3. Ferreira & Oliveira, 2016. "Portfolio efficiency analysis with SFA: the case of PSI-20 companies," Applied Economics, Taylor & Francis Journals, vol. 48(1), pages 1-6, January.
    4. repec:eee:jbfina:v:87:y:2018:i:c:p:248-263 is not listed on IDEAS
    5. Bart Frijns & Dimitris Margaritis & Maria Psillaki, 2012. "Firm efficiency and stock returns," Journal of Productivity Analysis, Springer, vol. 37(3), pages 295-306, June.
    6. Chrysovalantis Gaganis & Iftekhar Hasan & Fotios Pasiouras, 2013. "Efficiency and stock returns: evidence from the insurance industry," Journal of Productivity Analysis, Springer, vol. 40(3), pages 429-442, December.
    7. Quader, Manzur & Taylor, Karl, 2014. "Corporate Efficiency, Credit Status and Investment," IZA Discussion Papers 8285, Institute for the Study of Labor (IZA).
    8. Brandouy, Olivier & Kerstens, Kristiaan & Van de Woestyne, Ignace, 2015. "Frontier-based vs. traditional mutual fund ratings: A first backtesting analysis," European Journal of Operational Research, Elsevier, vol. 242(1), pages 332-342.
    9. Richard Chung & Scott Fung & Szu-Yin Hung, 2012. "Institutional Investors and Firm Efficiency of Real Estate Investment Trusts," The Journal of Real Estate Finance and Economics, Springer, vol. 45(1), pages 171-211, June.
    10. repec:eee:quaeco:v:66:y:2017:i:c:p:70-99 is not listed on IDEAS
    11. Chen Lin & Yue Ma & Frank M. Song, 2012. "What Drives Bank Operating Efficiency? The Role of Bank Competition and Credit Information Sharing," Chapters,in: Research Handbook on International Banking and Governance, chapter 4 Edward Elgar Publishing.

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