A translog estimation of the average cost function of the steel industry with financial accounting data

Theo Stratopoulos, Evangelos Charos and Kelly Chaston

International Advances in Economic Research, 2000, vol. 6, issue 2, 286 pages

Abstract: This paper proposes a measure to assess firm performance which is based in neoclassical production theory and yet can be empirically estimated with widely available financial accounting ratios. A translog cost function is estimated, and fitted per-unit average cost figures are generated based upon the firm's individual characteristics and industry norms. The deviation of a firm's actual average per-unit cost from the fitted value is proposed as a predictor of firm profitability. This measure is then tested on firms in the steel industry. It is shown that the accounting ratios generate a cost function which behaves in accordance with neoclassical microeconomic theory, and accounting profits are indeed found to be inversely related to the calculated efficiency measure. Copyright International Atlantic Economic Society 2000

Date: 2000
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DOI: 10.1007/BF02296108

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