Firm efficiency and stock returns: Australian evidence

Tze Chuan 'Chewie' Ang, A.S.M. Sohel Azad, Thu A.T. Pham and Angel Zhong

International Review of Financial Analysis, 2021, vol. 78, issue C

Abstract: We employ a stochastic frontier approach to estimate firm efficiency - the efficiency with which a firm converts its inputs into output. We find a negative relation between firm efficiency and the cross-section of stock returns (‘firm efficiency effect’) in the Australian stock market. The firm efficiency effect is robust after controlling for other firm characteristics and is more pronounced in stocks with high limits-to-arbitrage. However, we find no evidence that firm efficiency is a priced factor in the cross-section. Our findings suggest that investors misprice firm efficiency and arbitrage costs perpetuate its return predictability.

Keywords: Firm efficiency; Anomaly; Asset pricing; Arbitrage costs; Stochastic frontier approach; Risk-based explanation; “With its terms of trade declining Australia can no longer rely on the willingness of the rest of the world to pay more for its exports to fund improved living standards. Part of the challenge is improving the efficiency of Australian firms and other organizations that produce the goods and services we consume as a community and export to the rest of the world.”; - Robert Dolamore, 2014.; Parliamentary Library of Australia. (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:78:y:2021:i:c:s105752192100257x

DOI: 10.1016/j.irfa.2021.101935

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