Journal of Korean Society of Industrial and Systems Engineering (산업경영시스템학회지)

Society of Korea Industrial and System Engineering (한국산업경영시스템학회)
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Relationship between Firm Efficiency and Stock Price Performance

기업의 운영 효율성과 주식 수익률 성과와의 관계

  • Lim, Sungmook (Dongguk Business School, Dongguk University-Seoul)
  • 임성묵 (동국대학교-서울캠퍼스 경영대학 경영학과)
  • Received : 2018.11.07
  • Accepted : 2018.11.23
  • Published : 2018.12.31
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Abstract

Modern investment theory has empirically proved that stock returns can be explained by several factors such as market risk, firm size, and book-to-market ratio. Other unknown factors affecting stock returns are also believed to still exist yet to be found. We believe that one of such factors is the operational efficiency of firms in transforming inputs to outputs, considering the fact that operations is a fundamental and primary function of any type of businesses. To support this belief, this study intends to empirically study the relationship between firm efficiency and stock price performance. Firm efficiency is measured using data envelopment analysis (DEA) with inputs and outputs obtained from financial statements. We employ cross-efficiency evaluation to enhance the discrimination power of DEA with a secondary objective function of aggressive formulation. Using the CAPM-based performance regression model, we test the performance of equally weighted portfolios of different sizes selected based upon DEA cross-efficiency scores along with a buy & hold trading strategy. For the empirical test, we collect financial data of domestic firms listed in KOSPI over the period of 2000~2016 from well-known financial databases. As a result, we find that the porfolios with highly efficient firms included outperform the benchmark market portfolio after controlling for the market risk, which indicates that firm efficiency plays a important role in explaining stock returns.

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References

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