Fundamental analysis of stocks by two-stage DEA

Cristina Abad, Sten A. Thore and Joaquina Laffarga
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Cristina Abad: Universidad de Sevilla, Sevilla, Spain, Postal: Universidad de Sevilla, Sevilla, Spain
Sten A. Thore: The University of Texas at Austin, USA, Postal: The University of Texas at Austin, USA
Joaquina Laffarga: Universidad de Sevilla, Sevilla, Spain, Postal: Universidad de Sevilla, Sevilla, Spain

Managerial and Decision Economics, 2004, vol. 25, issue 5, pages 231-241

Abstract: Fundamental analysis of stocks links financial data to firm value in two consecutive steps: a predictive information link tying current financial data to future earnings, and a valuation link tying future earnings to firm value. At each step, a large number of causal factors have to be factored into the evaluation. To effect these calculations, we propose a new two-stage multi-criteria procedure, drawing on the techniques of data envelopment analysis. At each stage, a piecewise linear efficiency frontier is fitted to the observed data. The procedure is illustrated by a numerical example, analyzing some 30 stocks in the Spanish manufacturing industry in the years 1991-1996. Copyright © 2004 John Wiley & Sons, Ltd.

Date: 2004
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