Does relative (absolute) efficiency affect capital costs?

Abstract

In this paper, we examine the effect of relative/absolute firm efficiency on weighted average cost of capital (WACC). Using a sample of Korean listed firms, we find that WACC is negatively associated with relative firm efficiency (operational performance) suggesting that firms with higher (lower) relatively efficiency are expected to pay lower (higher) capital costs. When we repeat our analysis using absolute firm efficiency (ROA), we do not find a statistically significant relationship. Our results suggest relative efficiency which is estimated as output (sales) divided by the resources that are directly under the control of management is assessed by capital providers and impounded into a firm’s capital costs. Absolute efficiency (ROA) which is estimated as sales divided by total assets is not. Our results suggest that simple accounting ratios used in the accounting literature are not considered as informative to explain borrowing costs compared to relative efficiency that captures managerial operational performance.

An analysis of the effect of temporary/permanent contracts on firm efficiency performance: evidence from South Korea

“…Second, the study demonstrates a positive association between permanent contracts and firm performance using relative efficiency. Relative efficiency (estimated using Data Envelopment Analysis) is considered a felicitous measure of operational firm performance, because it is a measure of output generated, using inputs that are directly controlled by managers (Baik et al, 2013;Dermajian et al, 2012;Frijns et al, 2011;Mali and Lim, 2021). Thus, by demonstrating that increasing levels of permanent contracts are directly associated with day-to-pay operational performance, the study shows that organizational success is associated with contract quality.…”

“…, 2012). For example, Mali and Lim (2021) provide evidence that relative efficiency is impounded into borrowing costs, whilst ROA does not have an intervening effect. To explain the computational superiority of relative performance/efficiency compared to absolute efficiency ratios (such as ROA), three issues are highlighted.…”

“…, 2012a, b; Frijns et al. , 2012; Mali and Lim, 2021), both are considered proxies for firm performance. Thus, a positive association is expected between Relative_perform and ROA.…”

“…, 2012a, b; Frijns et al. , 2012; Mali and Lim, 2021). Thus, by using relative efficiency as a firm performance variable, the study can provide valuable insights to management about the effect of HC, contract quality and workforce management on operational business performance/efficiency.…”

أثر كفاءة الشركات وتقلبات الأرباح على العلاقة بین سیولة الأسهم وتكلفة الملكیة- بالتطبیق على الشركات المدرجة بالسوق السعودى

“…‫السابقة‬ ‫اسات‬ ‫الدر‬ ‫أشارت‬ ‫الصدد،‬ ‫هذا‬ ‫وفى‬ (e.g., Chen et al, 2020, ElBannan, 2017, Nadarajah et al, 2018 Ochenge et al, 2020, Cheung et al, 2019, Brogaard et al, 2017, Li and Di, 2019, Sarlak and Ahmadi, 2016, Jiang et al, 2017, Rahman and Rajib, 2018, Saad and Samet, 2017 ‫تفع‬ ‫المر‬ ‫السيولة‬ ‫تؤدي‬ ‫حيث‬ ، ‫إلى‬ ‫ة‬ ‫من‬ ‫توسع‬ ‫أن‬ ‫المرجح‬ ‫من‬ ‫التي‬ ‫و‬ ‫الخصم‬ ‫معدالت‬ ‫انخفاض‬ ‫وبالتالى‬ ‫المطلوبة،‬ ‫ائد‬ ‫العو‬ ‫انخفاض‬ ‫اإليجابية‬ ‫الصافية‬ ‫الحالية‬ ‫القيمة‬ ‫ذات‬ ‫الشركات‬ ‫مشروعات‬ (Ochenge et al, 2020) . ‫توصلت‬ ‫كما‬ ‫اسة‬ ‫در‬ (Cheung et al, 2019, Brogaard et al, 2017 (Mali and Lim, 2022) . ‫اسة‬ ‫در‬ ‫نتائج‬ ‫أثبتت‬ ‫كما‬ (Cheung, et al, 2019, Brogaard, et al, (Istiningrum, 2019, Cho and Kim, 2021, Aboud and Karlsen, 2019, Amihud et al, 2015, Fu and Huang, 2015 .…”