An Efficiency-Based Approach to Stock Selection

47 Pages Posted: 5 Jul 2015

See all articles by Irene Song

Irene Song

Columbia University - Department of Industrial Engineering and Operations Research (IEOR)

Iraj Kani

Samson Capital Advisors; Columbia University - Department of Industrial Engineering and Operations Research (IEOR)

Soulaymane Kachani

Columbia University

Date Written: April 3, 2014

Abstract

This study investigates the relationship between operational efficiency and stock performance. The analysis is conducted by building an efficiency-based stock selection strategy and assessing its performance over different investment horizons in a contextual and empirical setting provided by the U.S. Information Technology sector. By means of data envelopment analysis (DEA), operational efficiency is quantified into an efficiency score representing a consolidated measure of financial ratios. Based on the rankings of the estimated efficiency scores, various portfolios are formed and their performance is evaluated relative to appropriate market indices and the strategic benchmarks. Our empirical findings demonstrate that there is a significant and positive relationship between operational efficiency and stock performance, and establish that operational efficiency has significant explanatory power in describing the cross-sectional variations of stock returns. This study further presents an economic argument that posits operational efficiency as a systematic risk factor and the most likely source of excess returns of investing in efficient firms.

Keywords: Data Envelopment Analysis, Stock Selection, Operational Efficiency, Fundamental Analysis, Relative Value Analysis

Suggested Citation

Song, Irene and Kani, Iraj and Kachani, Soulaymane, An Efficiency-Based Approach to Stock Selection (April 3, 2014). Available at SSRN: https://ssrn.com/abstract=2626657 or http://dx.doi.org/10.2139/ssrn.2626657

Irene Song (Contact Author)

Columbia University - Department of Industrial Engineering and Operations Research (IEOR) ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

Iraj Kani

Samson Capital Advisors ( email )

600 Lexington Avenue, 20th Floor
New York, NY 10022
United States

Columbia University - Department of Industrial Engineering and Operations Research (IEOR) ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

Soulaymane Kachani

Columbia University ( email )

500 W. 120th St
New York, NY 10027
United States
2128541804 (Phone)

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