1. Hai Yen Pham, Richard Chung, Eduardo Roca, and Ben-Hsien Bao
Do Investors Value Firm Efficiency Improvement? Evidence from the Australian Context?
Authors:
Hai Yen Pham, Richard Chung, Eduardo Roca, and Ben-Hsien Bao
Discussion
Searat Ali
Griffith University

2. Subsequent stock returns
What this paper does
Do investors value improvement in efficiency?
Stochastic Frontier Analysis (SFA) to evaluate a firm’s efficiency
Sample firms: non-financial companies
Sample country: Australia
Sample period: January 1990 to October 2012
Efficiency change
Subsequent stock returns

3. What this paper does How efficient Australian firms are?
Portfolio performance analysis
Preliminary analysis: High vs low CH sorted portfolios
The Carhart 4-factor Model
Effect of efficiency change on subsequent stock returns
Panel Data Analysis
The Fama-MacBeth (1973) Typed Regressions
The Issue of Endogeneity
Robustness on ARCH/GARCH effects
Robustness on Seasonality

4. Results and interpretation
Average efficiency score is 61.5%
The paper shows that over the sample period, the estimated mean improvement in firm’s efficiency is 3% per year.
Equally-weighted (value-weighted) portfolio of stocks with the top tertile level change in efficiency outperforms an equally-weighted (value-weighted) portfolio of stocks with the bottom tertile level change in efficiency, by an average of 11% (7%) per annum during the sample period.
There is a significant efficiency change effect on a cross-section of stock returns after controlling for other risk factors such as size, book- to-market, market liquidity, industry concentration, and seasonality effect.
These findings are not sensitive to different estimation methods, endogeneity bias etc.

5. Some of the paper’s strengths
Methodology is well explained: Portfolio construction, return models
Large dataset: Cross-section (14,857 firm-year observations or 137,174 firm-month observations) time series (22 years).
Strong results robust to a large number of control tests (e.g., fixed effect, Fama-MacBeth, GMM)
Top ranked journal references
Grade
Frequency
Most cited A* 30
JFE, JF A 10
AJM B 3 AE C --

6. Comments/suggestions
1-Major contributions 2-Interpretation of results 3-Instrumental variable 4-Referencing and proofreading

7. Comments/suggestions
1-Major contributions

8. Comments/suggestions
Gap in literature
There are number of studies examining the relationship between efficiency and stock returns.
Gap: The results are mixed. Either positive or negative. Most of the studies find……..?
How your study is resolving the issue of mixed findings?
Suggestion: Try to figure out why there are mixed results in the literature?
Because of country?
Because of industries?
Because of sample period? Data after GFC?
Sample size?
Methodology? DEA or SFA; RE, FE, GMM.

9. Comments/suggestions
Contributions of the study
Data is the driver whereas idea and tool are passengers
First study in Australia considering non-financial firms.
Suggestion: Why it is important to study efficiency return nexus in Australia? What are the expected results?
Large sample.
Suggestion: Argue that the prior literature suffers from small sample bias.
Examines EC effect over time and across industries.
Suggestion: Emphasize on the value it will bring to the literature.

10. Comments/suggestions
2-Interpretation of results

11. Comments/suggestions
Results of the study
Low portfolios: High systematic risk, small stocks, value stocks, mom is insignificant
Risk premium
Size premium? yes
Value premium?
Liquidity premium? yes
Efficiency premium? No
Adjusted Rsq=0.0004?

12. Comments/suggestions
What is the implication of the industry based regressions?
Industries
Panel data
Fama-MacBeth CH
%CH
Energy No
Materials
Yes
Industrials
Consumer D
Consumer S
Health care IT
Telecommunication
Utilities

13. Comments/suggestions
3-Instrumental variable

14. Comments/suggestions
Instrument
Corporate governance mechanisms such as board size, Proportion of non-executive directors, CEO duality, top20 shareholding percentage.
Relevance: fine
Prior studies suggest that an improvement in corporate governance could lead to a better monitoring mechanism, better operation, and thus, an improvement in firm efficiency.
Suggestion: 1) use CGQ index 2) Display first-stage result to show relevance.
Exclusion: critical
However, the empirical evidence suggests the existence of other factors not captured by beta, such as size and book-to-market (Fama and French, 1992), momentums (Jegadeesh and Titman, 1997), excess cash holding (Dittmar and Marhrt-Smith, 2007), liquidity (Chan and Faff, 2003; Mahipala, Chan and Faff, 2009), default risk (Garlappi, Shu and Yan, 2008), industry concentration (Hou and Robinson, 2006) and corporate governance (Gompers, Ishii and Metrick, 2003).

15. Comments/suggestions
4-Referencing and proofreading

16. Comments/suggestions
Update the references
Minor issues: Some proof reading required…
Target AJM
Altogether, it was a joy to read this paper and potential to make an important contribution to the literature.
Year
Frequency
2015
2014
2013 5
2012 6
2011 1
2010