Corporate efficiency in the UK: a stochastic frontier analysis

Syed Manzur Quader (School of Business, Chittagong Independent University, Chittagong, Bangladesh)
Michael Dietrich (Department of Economics, University of Sheffield, Sheffield, UK)

International Journal of Productivity and Performance Management

ISSN: 1741-0401

Publication date: 4 November 2014

Abstract

Purpose

Using a panel of 1,122 UK firms listed on the London Stock Exchange over the period of 1981-2009, corporate efficiencies are predicted in this paper as inverse proxies of agency cost and the agency cost hypotheses are tested. The paper aims to discuss this issue.

Design/methodology/approach

Stochastic frontier analysis is used to estimate corporate efficiency of firms, but from two different perspectives. The long-run and short-run corporate efficiencies are predicted focussing on modern approach of value maximization and traditional approach of profit maximization, respectively.

Findings

The estimation results reveal that, an average firm in the sample achieves 74.5 percent of its best performing peer's market value and 86.6 percent of its best performing peer's profit and both of them are highly significant in the analysis. The long-run market value efficiency supports the agency cost of outside equity and the short-run profit efficiency supports the agency cost of outside debt hypothesis. Also there is a positive rank correlation between these two efficiencies which confirms that an average firm in the UK suffers from inefficiency or agency conflicts to a certain extent, no matter whether the firm is driven by short-run or long-run growth perspectives.

Research limitations/implications

The predicted broad measures of agency costs in the paper have wider implications in enhancing the understanding of the UK firms’ corporate performance especially when they operate under a relatively free and market based governance and financial system.

Originality/value

The work is distinguished by the large panel of UK firms and a long period of time that is considered. Emphasizing on the empirical implications of the distinctions between short-run and long-run efficiency is also novel.

Keywords

Acknowledgements

JEL Classifications — C33, D82, G32, L25

The authors are especially thankful to Professor Karl Taylor, Dr Anita Ratcliffe, the participants in the departmental internal seminars at the University of Sheffield, UK and unknown reviewers for their valuable comments on earlier drafts of this paper, but the responsibility for any errors and omissions remains our own of course.

Citation

Manzur Quader, S. and Dietrich, M. (2014), "Corporate efficiency in the UK: a stochastic frontier analysis", International Journal of Productivity and Performance Management, Vol. 63 No. 8, pp. 991-1011. https://doi.org/10.1108/IJPPM-07-2013-0125

Publisher

:

Emerald Group Publishing Limited

Copyright © 2014, Emerald Group Publishing Limited

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