A Model to Compare Firms' Efficiency in Creating Shareholders' Value

Abstract

The first objective of this study is to develop a Data Envelopment Analysis (DEA) model to determine the relative technical efficiency of firms to create shareholders' value. The second objective is to compare the technical efficiency with the profit ratios in the Du Pont analysis to determine whether there are some consistencies between these two measures of performance. Data of 33 JSE Limited listed manufacturing companies were used over a five-year period. The study found that there is a significant monotone dependence between the annual technical efficiency and the return on equity of companies. The practical implication of the study is that it provides a functional model that indicates an aggregated judgement of a firm's efficiency of using resources to create shareholders' value, and, the readily available return on equity can be used as a substitute to technical efficiency, which is more complicated to calculate. The value of this study is that it is the first to apply a unique DEA model for profit-motive companies.