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Firm Characteristics, Relative Efficiency, and Equity Returns

Published online by Cambridge University Press:  01 February 2009

Giao X. Nguyen  and
Peggy E. Swanson
Giao X. Nguyen
Affiliation:
Viet Capital Securities, 67 Ham Nghi St., District 1, Ho Chi Minh City, Vietnam. giao.nguyen@vcsc.com.vn
Peggy E. Swanson
Affiliation:
College of Business Administration, Box 19449, University of Texas at Arlington, Arlington, TX 76019. swanson@uta.edu
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Abstract

This study uses a stochastic frontier approach to evaluate firm efficiency. The resulting efficiency score, based on firm characteristics, is the input for performance evaluation. The portfolio composed of highly efficient firms significantly underperforms the portfolio composed of inefficient firms even after adjustment for firm characteristics and risk factors, suggesting a required premium for the inefficient firms. The difference in performance between the two portfolios remains for at least five years after the portfolio formation year. In addition, firm efficiency exhibits significant explanatory power for average equity returns in cross-sectional analysis.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 1 , February 2009 , pp. 213 - 236
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

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