Efficiency and stock market performance in electric power generating companies

Abstract

Efficiency in energy production and distribution should have a positive effect on the market performance of the power companies equity issues. However, there are institutional factors that may dilute the effect. To investigate this linkage, we measure the efficiency of 41 electric power companies, as well as the market performance of their common stocks over a five-year period. To measure the efficiencies of power companies, we apply techniques of data envelopment analysis (DEA) that allow for different output mixes to characterize different companies. The extent of this linkage is important for management of electric power companies, especially those that are privatized. DEA is accomplished using linear programming methodology. The DEA approach is applied to data from 1986 to 1990. The growth in relative efficiency is calculated for a group of decision-making units, based on the ratio of outputs to inputs, where inputs are weighted by their market values and outputs by their costs in terms of inputs. These relative efficiency measures are then compared with the performances of common stocks of the companies for the same five-year period. DEA permits evaluation of both technical and allocative dimensions of the efficiency of an enterprise. Among other objectives, we attempt to determine whether changes in technical or allocative efficiency have greater or more immediate impact on stock market performance. Because regulatory practices intervene between efficiency and profitability, it is interesting to analyze the deviations from the expected market performances predicted by pure physical or engineering efficiency.