THE ASSOCIATION BETWEEN TECHNICAL EFFICIENCY INNOVATIONS AND STOCK RETURNS: AN APPLICATION OF DATA ENVELOPMENT ANALYSIS

ABSTRACT

This paper examines the association between two measures of a firm's performance in Taiwan Electronic Industry: its relative technical efficiency scores and its stock market returns. The first measure evaluates a firm's competence at combining inputs and outputs in its production process while the second measure reflects firm's fundamental value. We measure technical efficiency scores by using Data envelopment analysis (DEA). Then a hedge portfolios strategy, of buying firms with the most positive efficiency news and short-selling those with the worst news, is formed in turn. Empirical results indicate that the strategy yields positive buy-and-hold abnormal returns. More importantly, the addition of variables designed to capture beta risk, unexpected earnings, earnings-to-price, book-to-market and size has no impact on the robustness of technical efficiency to predict future returns.

Keywords:

• technical efficiency
• data envelopment analysis
• stock returns
• abnormal returns