Has Corporate Efficiency Changed Over Time and With Change in Technology? A Stochastic Frontier Approach

Document Type

Peer-Reviewed Article

Publication Date



Corporate efficiency matters to accountants and financial economists. Key management, legal, external stakeholder, and regulatory decisions often hinge on accurate assessment of efficiency. We compute efficiency for a large group of U.S. firms over six decades using traditional accounting-based and tangible measures of performance, or absolute efficiency. Then, we propose an alternative approach to compute relative efficiency based on a stochastic frontier method. This latter approach incorporates key internal inputs such as managerial incentives and investment in intangible assets such as R&D and advertising as well as external inputs such as industry competition and the disciplinary role of debt. We observe random changes and decline over time in traditional accounting-based performance for the average firm. The burst of the dot com bubble had the greatest impact on most traditional measures, with higher efficiency loss during that event than in the great recession. In contrast, the oil crisis, the burst of the dot com bubble, and the great recession—in that order—showed the steepest declines in efficiency estimated with the stochastic frontier. Ignoring these extreme shocks, the stochastic frontier method provides U-shaped curves, in which corporate efficiency declined between 1960 and 1990s and increased since then. This efficiency gain is contemporaneous with the explosion and continuation of mergers and acquisitions and reduced competition beginning in late 1980s.


Online before print, July 8, 2023