The effect of efficiency on stock returns

Investing in the stock market involves risk for investors. To minimize risk, investors need to know how stock prices are formed and what variables affect stock returns. A company's performance is one of the most important internal factors affecting stock returns. And a company's efficiency level is an important tool for measuring corporate performance. Therefore, this study investigated the relationship between efficiency and stock returns, which is an indicator of corporate performance, using data from 104 companies in the Borsa Istanbul (BIST) Industrial Index between 2000 and 2019. Nonparametric data envelopment analysis (DEA) is used to calculate the efficiency values. In the calculation of DEA, total assets, cost of sales and operating costs are used as inputs, and sales and net profit are used as outputs. Panel regression analysis is used to examine whether corporate efficiency has explanatory power for the cross-section of stock returns. In addition, the 104 companies listed in the industrial indices of the Istanbul Stock Exchange are divided into five subsectors to examine how they differ from each other and from the main sector. The results of the analysis suggest that the efficiency of the companies in the industrial indices of the Istanbul Stock Exchange has explanatory power for the cross-section of their stock returns. However, for the five subsectors, efficiency is found to have no explanatory power for the cross-section of their stock returns.