Modeling profitability and stock market performance of listed construction firms on the athens exchange: Two-stage DEA approach

The purpose of this paper is to evaluate the performance of a sample of nineteen construction firms listed on the Athens Exchange by applying a two-step procedure. In the first step, data envelopment analysis (DEA) is used to model performance in two dimensions: profitability efficiency and efficiency in the market value-generating process. This allows the independent identification of the most efficient level of input in minimizing resources and the most efficient level of output in maximizing market value, various benchmarks, and the local returns to scale patterns of the firms of the sample in both performance dimensions. Moreover, it is possible to examine whether a correlation exists between the performance efficiency scores. In the second step, regression models are used to identify the drivers of performance. Performance inefficiency is uncovered in both dimensions, but the real problem of inefficiency of the sampled firms is the lower level of performance in the market value-generating process rather than profitability. The results revealed that profitability can be explained by selling and the administrative cost-to-total-revenue ratio and profit margin, but there is not much evidence for systematic effects of control variables on firm valuation. Results do not show positive links between profitability efficiency and performance in the stock market. Most of the large, inefficient firms exhibit decreasing returns to scale (DRS) in the profitability dimension, whereas most of the inefficient firms exhibit increasing returns to scale (IRS) in the stock market performance dimension. Moreover, there is potential for the firms of the sample that operate under non-DRS to accommodate and manage higher levels of business volume that will lead to increased level of market value. Implications of the study are also discussed.