Estimation of firm performance from a MIMIC model

Kausik Chaudhuri, Subal Kumbhakar and Lavanya Sundaram

European Journal of Operational Research, 2016, vol. 255, issue 1, 298-307

Abstract: In this paper we propose a new approach (based on the Multiple Indicator Multiple Cause (MIMIC) model of Joreskog and Goldberger (1975) to assess the performance of firms assuming that the ‘true’ firm performance is latent but there are many observable indicators of it. In our MIMIC model, the latent firm performance variable is linked with some observed explanatory variables (determinants) like age, size, advertising expenses, debt equity ratio, etc. Since there are many observed indicators (ROE, ROA, Tobin's Q, etc.) of the unobserved latent firm performance, the measurement equations in the MIMIC model link these observed indicators to the latent performance measure. We use firm level data from India during the period 2001 to 2008 to estimate the latent firm performance using the predicted factor scores and rank the firms according to the proposed measure. Finally, we estimate two stochastic frontier models and compute Pearson's correlation between pairs of performance measures. We find high rank correlation between the two measures of firm performance/efficiency, which justifies the use of the MIMIC model as a complementary method of performance measures.

Keywords: Firm performance; MIMIC model; Ownership structure (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0377221716303253
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:255:y:2016:i:1:p:298-307

DOI: 10.1016/j.ejor.2016.05.005

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Catherine Liu ().