Evaluating the Relation between Relative Efficiency and Equity Returns of industrial companies in the privatization process

Considering the emphasis of the Vision Plan and especially the Fourth Development Plan on economic efficiency and return, as well as the announcement of the policies of Article 44 of the Constitution in 2005 based on the transfer of state-owned companies to the private sector and the implementation of “Justice Shares“ plan during this program, this article has been prepared with the aim of analyzing the relation between relative efficiency and equity returns for firms active in the Tehran Stock Exchange. Although the stochastic frontier analysis is an already established method for measuring firm efficiency in production economics, it has just recently begun to be employed in the field of finance. And it can be applied in the equity pricing. The findings of this analysis show that once the other factors and parameters affecting the rate of return were successfully controlled, firm efficiency would obtain a significant explanatory power for average equity returns in cross-sectional analysis of data. Moreover, the findings of this study show that the relative significance of efficiency on returns depends on firm size. The paper uses the firm-level panel vector autoregressive (P VAR) approach to examine the dynamic relation between firm efficiency and stock return. The findings show that the relation between the two is significant, and in line with theoretical studies.