Evaluating the efficiency of stock performance: A Cobb-Douglas function in stochastic frontier analysis approach

Abstract

Measuring company performance-based financial ratios is common among decision makers such as business analysts, shareholders, creditors, prospective investors and financial managers. Ratio analys is is a powerful tool to enable stakeholders to analyze the health ofcompanies' financial status. Financial ratios provide comparative financial status among companies within an industry or within a company itself. The decision maker can use ratios to identify internal strengths and weaknesses, and estimate future financial performance to compare companies in order to make a decision. Using econometric technique, this study employed the production function ofthe frontier to determine the performance and to analyse the productivity ofcompanies. The purpose of this paper is to evaluate and measure the performance of115 samples oflisted companies in Bursa Malaysia which will be discussed in terms ofmathematical analys is. The Cobb-Douglas function was estimated using Maximum Likelihood to determine the values of parameters in the model. This study will utilize input ofdebt-equity ratio and asset turnover to maximize the output, return on equity ratio. This paper will mainly contribute in showing how the selection output based on DuPont theory was selected where the highest return on stockholders' investment is set as main objective and estimating the technical efficiency ofcompanies using financial ratio.