Profit Efficiency and Its Determinants: A Comparative Analysis of Energy and Non-Energy Sectors of Pakistan using Stochastic Frontier Approach

Abstract

This study examines profit efficiency and its determinants in the corporate sector of Pakistan during the study period by using a stochastic frontier approach (SFA), specified by Battese and Coelli (1995). A balanced panel data of 30 companies, 22 manufacturing, and 8 energy companies for the period 2009–2018 was constructed for the empirical analysis. All the required data for the analysis were obtained from various annual reports of the company and its official website. The study found that the profit efficiency of the corporate sector of Pakistan is increasing over the study period. However, on average, overall companies have met only 35.75% of their profit-generating potentialities relative to the best-practice companies, due to inefficiency, which is arising within the companies supported by a degree of variance value which is 75.75%. Companies in the energy sector have greater profit efficiency (52%) than the non-energy sector (39%). Further overall efficiency effects model shows that firm-age, labor productivity, export orientation, and firm-size are positively related to the profit efficiency of companies in Pakistan. However, labor productivity and export orientation are negatively correlated in the manufacturing sector but positively correlated with profit efficiency in the energy sector. Whereas firm size is positively related to profit efficiency in the manufacturing sector but has an insignificant relationship in the energy sector. The research findings can help managers and policymakers of the corporate sector of Pakistan in managing the level of efficiency in energy and non-energy companies and implications of strategies for improving organization efficiency by considering determinant factors and driving policies that influence profit efficiency under each sector.