THE EFFECT OF FIRM’S EFFICIENCY ON STOCK RETURNS

Abstract

Investing in the stock market involves risk for investors. In order to minimize risk, investors need to have information about how stock prices are formed and what variables affect stock returns. One of the important internal factors affecting a stock's return is the performance of that company. The efficiency level of a company is an important tool used to measure the performance of that company. Therefore, in this study, the relationship between the company's efficiency scores and stock returns, as an indicator of company performance, was examined for the years 2000-2019 of 104 companies in the Borsa Istanbul (BIST) Industrial Index. Nonparametric data envelopment analysis (DEA) is used to calculate the firms’ efficiency scores. While calculating company efficiency scores with DEA; total assets, cost of sales and operating expenses were used as input, sales and net profit were used as output, and as a result, an efficiency score was obtained for each company on a yearly basis. Panel regression analysis is used to examine whether corporate efficiency has explanatory power for the cross-section of stock returns. In addition, the 104 companies listed in the industrial indices of the Istanbul Stock Exchange are divided into five subsectors to examine how they differ from each other and from the main sector. The results of the analysis suggest that the efficiency of the companies in the industrial indices of the Istanbul Stock Exchange has explanatory power for the cross-section of their stock returns. However,  as a result of the analysis conducted on a sub-sector basis, it was concluded that efficiency scores do not have an explanatory power on the stock returns.