Abstract
In this paper, a cross-sectional samples data of 115 Malaysian stocks have been employed to compare both Data Envelopment Analysis (DEA) method and Stochastic Frontier Analysis (SFA) method. These approaches are used to provide a review of frontier conceptual measurement, strength and limitation of the parametric and non-parametric models. Stochastic frontier production function of Cobb-Douglas type was utilized for the estimation. The function was estimated using the maximum likelihood estimation technique. Two models in DEA, DEA-CCR and DEA-BCC are applied in this study and the ranking correlation between SFA method and both models DEA are determined by using the Spearman rank method. The result revealed using SFA, the mean technical efficiency of sample consumer product companies is 37.5% and implies that companies operating at means level of technical efficiency could produce 80.1% more output for given level of inputs if they become technically more efficient. From empirical results of the SFA method, we determined that the deviations from the efficient frontiers of production functions are largely attributed to inefficiency effects (technical inefficiency). Finally, the findings also showed that the difference in ranking stocks performance using DEA-CCR, DEA-BCC and SFA methods. The main contribution of the paper is showing the comparative performance based on both model, DEA and SFA method using financial ratio.
Highlights
Evaluation of performance can be measured using productivity ratio
For non-parametric approach, the decision-making unit (DMU) is called technically efficient due to the fact that the DMU operates on the production frontier and they are not technically efficient when it is below the frontier
Many researchers have studied the parametric technique, Stochastic Frontier Analysis (SFA) method for analyzing various DMU disciplines such as investigating on the technical efficiency of the Malaysian domestic banks listed in the Kuala Lumpur Stock Exchange (KLSE) market [2] and comparing the performance farms in the Swiss mountain region [3]
Summary
Evaluation of performance can be measured using productivity ratio. A process of the decision-making unit (DMU) will employ the resource inputs to produce the desired products or services called as productivity ratio. Many researchers have studied the parametric technique, Stochastic Frontier Analysis (SFA) method for analyzing various DMU disciplines such as investigating on the technical efficiency of the Malaysian domestic banks listed in the Kuala Lumpur Stock Exchange (KLSE) market [2] and comparing the performance farms in the Swiss mountain region [3]. There is less study that has been done to measure the efficiency of stocks performance listed in the Bursa Malaysia using the financial ratio based on the parametric approach. We are interested to investigate the efficiency performance by using two techniques; parametric method (e.g., SFA) and non-parametric method (e.g., DEA). It can be done by applying a samples data of the Malaysian stock market. The final section presents the overall conclusion of this research analysis and suggestion for future studies
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