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The predictive ability of relative efficiency for future earnings: an application using data envelopment analysis to Spanish SMEs
[journal article]
Abstract Research on earnings prediction has documented that the transitory component of current earnings undermines its predictive ability about future earnings. The implication of this finding is that a measure that better captures the underlying persistent component of earnings may prove very useful in pr... view more
Research on earnings prediction has documented that the transitory component of current earnings undermines its predictive ability about future earnings. The implication of this finding is that a measure that better captures the underlying persistent component of earnings may prove very useful in predicting future earnings when used along with current earnings. Our study, based on a large sample of 1939 Spanish small and medium enterprises (SMEs), investigates whether an alternative mesure of performance ignored in previous research on earnings forecasting -i.e., relative efficiency- has predictive ability over and above current earnings and book value of equity. Relative efficiency captures the inherent ability of a firm -as compared to other similar firms- to make the most productive use of available resources and is measured using Data Envelopment Analysis (DEA) non-parametric technique. Our findings highlight that our DEA-based efficiency measure has an incremental predictive ability over and above current earnings and book value of equity for predicting future earnings. Moreover, we have further validated the models in a holdout sample and our results evidence the highest forecast accuracy of the model that includes our efficiency measure as an additional predictor to current earnings and book value of equity.... view less
Keywords
prognosis; income; Spain
Classification
Economic Statistics, Econometrics, Business Informatics
Business Administration
Free Keywords
relative efficiency; earnings prediction; DEA; SMEs; Data-Envelopment-Analyse; Klein- und Mittelunternehmen
Document language
English
Publication Year
2008
Page/Pages
p. 2751-2757
Journal
Applied Economics, 42 (2008) 21
DOI
https://doi.org/10.1080/00036840801964575
Status
Postprint; peer reviewed
Licence
PEER Licence Agreement (applicable only to documents from PEER project)