DO INVESTORS VALUE FIRM EFFICIENCY IMPROVEMENT? EVIDENCE FROM THE AUSTRALIAN CONTEXT

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Abstract

Do investors value improvement in efficiency? This paper investigates the relation between the firm’s technical efficiency change and subsequent stock returns. We employ a stochastic frontier analysis to evaluate a firm’s efficiency for a large panel of non-financial companies in Australia from January 1990 to October 2012. The results show that over the sample period, the estimated mean improvement in firm’s efficiency is 3% per year. We find that an equally-weighted (value-weighted) portfolio of stocks with the top tertile level change in efficiency outperforms an equally-weighted (value-weighted) portfolio of stocks with the bottom tertile level change in efficiency, by an average of 11% (7%) per annum during the sample period. We also find a significant efficiency change effect on a cross-section of stock returns after controlling for other risk factors such as size, book-to-market, market liquidity, industry concentration, and seasonality effect.

Keywords: Efficiency change, Stock returns, Stochastic frontier analysis

How to cite this paper: Pham, H.Y., Chung, R., Roca, E., Bao, B.-H. (2016). Do investors value firm efficiency improvement? Evidence from the Australian context. Corporate Ownership & Control, 13(3-2), 293-308. https://doi.org/10.22495/cocv13i3c2p4