Firm Characteristics, Relative Efficiency, and Equity Returns
Source: Nguyen & Swanson (2009) · Journal of Financial and Quantitative Analysis · DOI: 10.1017/s0022109009090012
TL;DR
Using a stochastic-frontier approach to score each firm's productive efficiency from its characteristics, Nguyen & Swanson find a surprising result: the most-efficient firms underperform the least-efficient, even after risk and characteristic adjustment. Investors appear to overpay for highly efficient ('best run') firms, accepting a lower required return.
Sorting variable: stochastic-frontier efficiency score from firm characteristics.
Universe: firms with the required characteristics.
Portfolio formation: rank into efficiency deciles.
Long / short: long inefficient, short efficient.
Weighting: value-weighted.
Rebalancing: annual.
Evidence and replication
Period
Notes
Source
IS (1980s–2000s)
efficient firms underperform inefficient ones
this paper
OOS (post-2009)
a 'quality-glamour' overpayment effect
post-publication
OSAP (Frontier)
replicates
Chen & Zimmermann 2022
Why it might work
Overpayment for quality: investors bid up well-run firms, depressing forward returns.
Expectations errors: efficiency is extrapolated too optimistically.
Limitations and risks
Model dependence: the efficiency score is estimation-heavy.
Quality overlap: correlated with profitability/quality glamour.
Interpretation: efficiency vs growth-expectations is hard to disentangle.
Key references
Nguyen, G. & Swanson, P. (2009) — Firm Characteristics, Relative Efficiency, and Equity Returns — JFQA — DOI: 10.1017/s0022109009090012
Provenance: generated from the paper's abstract and metadata, not full text; sample periods and replication notes are indicative — verify against the source.
