Title

Efficiency and Book-to-Market Ratios of U.S. Pharmaceutical Firms

Document Type

Article

Publication Date

6-20-2022

Abstract

Using data envelopment analysis (DEA), we calculate sales efficiency for U.S. pharmaceutical firms and find it to be positively associated with those firms’ book-to-market ratios (a measure widely used in the finance literature to estimate the risk and growth potential of firms’ common stock). Thus, we conclude that sales-efficient firms in this industry are, on average, undervalued and suggest that the U.S. pharmaceutical industry is characterized by firms making off-balance sheet investments, which we argue leads to efficiency during our sample years (2009-2015). We also conduct longitudinal analyses and conclude that firms in our sample with smaller asset levels are more efficient. Finally, we conduct a slack analysis, which concludes that most of the overvalued companies exhibit inefficiencies in their utilization of research and development costs and selling, general, and administrative costs. Fewer of those firms exhibit inefficient utilization of their costs of goods sold.

Language

English

Comments

This article is the authors' final published version in Journal of Applied Business and Economics, Volume 24, Issue 3, June 2022, Pages 169-184.

The published version is available at https://doi.org/10.33423/jabe.v24i3.5197. Copyright © North American Business Press

DOI

https://doi.org/10.33423/jabe.v24i3.5197

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