Rights statement: This is a post-print of an article published in Contemporary Accounting Research, 30 (3), 2013. (c) Wiley.
Accepted author manuscript, 219 KB, PDF document
Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Changes in operational efficiency and firm performance
T2 - a frontier analysis approach
AU - Baik, Bok
AU - Chae, Joon
AU - Choi, Sunhwa
AU - Farber , David
N1 - This is a post-print of an article published in Contemporary Accounting Research, 30 (3), 2013. (c) Wiley.
PY - 2013/9
Y1 - 2013/9
N2 - 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.
AB - 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.
KW - Operational efficiency
KW - Data Envelopment Analysis
KW - Stochastic Frontier Analysis
KW - Fundamental Analysis
U2 - 10.1111/j.1911-3846.2012.01179.x
DO - 10.1111/j.1911-3846.2012.01179.x
M3 - Journal article
VL - 30
SP - 996
EP - 1026
JO - Contemporary Accounting Research
JF - Contemporary Accounting Research
SN - 0823-9150
IS - 3
ER -