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The predictive ability of relative efficiency for future earnings: an application using data envelopment analysis to Spanish SMEs

Listed author(s):
  • Carmelo Reverte
  • Isidoro Guzman
Registered author(s):

    Research on earnings prediction has documented that the transitory component of current earnings undermines its predictive ability about future earnings. The implication of this finding is that a measure that better captures the underlying persistent component of earnings may prove very useful in predicting future earnings when used along with current earnings. Our study, based on a large sample of 1939 Spanish Small and medium Enterprises (SMEs), investigates whether an alternative measure of performance ignored in previous research on earnings forecasting-i.e. relative efficiency-has predictive ability over and above current earnings and book value of equity. Relative efficiency captures the inherent ability of a firm-as compared to other similar firms-to make the most productive use of available resources and is measured using Data Envelopment Analysis (DEA) nonparametric technique. Our findings highlight that our DEA-based efficiency measure has an incremental predictive ability over and above current earnings and book value of equity for predicting future earnings. Moreover, we have further validated the models in a holdout sample and our results evidence the highest forecast accuracy of the model that includes our efficiency measure as an additional predictor to current earnings and book value of equity.

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    Article provided by Taylor & Francis Journals in its journal Applied Economics.

    Volume (Year): 42 (2010)
    Issue (Month): 21 ()
    Pages: 2751-2757

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    Handle: RePEc:taf:applec:v:42:y:2010:i:21:p:2751-2757
    DOI: 10.1080/00036840801964575
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