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Changes in operational efficiency and firm performance: a frontier analysis approach

Research output: Contribution to journalJournal article

Published

Journal publication date09/2013
JournalContemporary Accounting Research
Journal number3
Volume30
Number of pages31
Pages996-1026
Early online date27/12/12
Original languageEnglish

Abstract

This study examines whether changes in operational efficiency predict firm performance. Using measures based on frontier analysis as our proxies for operational efficiency, we find that changes in efficiency are positively associated with changes in current and future earnings. We also find a positive relation between efficiency changes and contemporaneous stock returns, implying that investors find the information in efficiency changes to be value relevant. However, we also show that efficiency changes predict future stock returns, suggesting that market participants do not fully incorporate the predictive power of changes in efficiency for future changes in profitability. Finally, we show that our measures of operational efficiency changes are positively associated with analyst forecast revisions, but not associated with analyst forecast errors; these results suggest that analysts have a deep understanding of firms’ efficiency. Importantly, our results hold even after controlling for fundamental signals and changes in asset turnover, a commonly used proxy for operational efficiency. Overall, our study provides evidence suggesting that measures of operational efficiency derived from frontier analysis have predictive power incremental to simple financial ratios. Results from our study therefore have implications for fundamental analysis.

Bibliographic note

This is a post-print of an article published in Contemporary Accounting Research, 30 (3), 2013. (c) Wiley.