A Model for Evaluating Financial Performance of Companies by Data Envelopment Analysis

Topics: Financial ratio, Financial ratios, Mutual fund Pages: 16 (5121 words) Published: September 6, 2012
International Business Research; Vol. 5, No. 8; 2012 ISSN 1913-9004 E-ISSN 1913-9012 Published by Canadian Center of Science and Education

A Model for Evaluating Financial Performance of Companies by Data Envelopment Analysis A Case Study of 36 Corporations Affiliated with a Private Organization Reza Tehrani1, Mohammad Reza Mehragan1 & Mohammad Reza Golkani1 1

School of Management, University of Tehran, Tehran, Iran

Correspondence: Mohammad Reza Golkani, School of Management, University of Tehran, Tehran, Iran. Tel: 98-915-518-0130. E-mail: rezagolkani@ut.ac.ir Received: May 15, 2012 doi:10.5539/ibr.v5n8p8 Abstract In the contemporary world, with the rapid growth of commercial activities there is no doubt on the inevitability of existence of a performance evaluation system in all organizations. This necessity is so evident that the lack of an evaluation system is regarded as a symptom of the organization unhealthiness. Financial evaluations encourage companies to attain a higher level of performance by showing current financial position of a company in relation to other companies and creating a competitive environment. Such evaluations are also useful in reforming and improving weaknesses which is done through recognition of the strengths of performed activities. To this end, the present study has developed a model to evaluate corporate performance through data envelopment analysis and has examined the model on a group of companies. To do so, the means of financial performance for a five year period including: liquidity, activities, leverage, and economic added value are employed as input indices of Data Envelopment Analysis (DEA) Model and profitability ratios as output indices of the model. BCC input oriented covering model was used to rank the companies under study. Besides, a group of 36 companies were employed as the sample in the present case study of which 9 companies were found as efficient and the remaining 27 companies were regarded as inefficient. Efficient corporate were further ranked by Anderson Peterson Model. Finally, the extent and causes of weaknesses of each company were expressed by the use of reference units and auxiliary variables. Keywords: data envelopment analysis, performance evaluation, evaluation 1. Introduction Performance evaluation is regarded as a useful step in attaining a self evaluation method and consequently the improvement of accountability power. Some scholars have considered performance evaluation as a part of the great and emerging movement of accountability. They believe that performance evaluation is one of the best methods employing an accountability approach. Performance evaluation is itself in the need of some indexes through which to evaluate corporate performance. Performance evaluation indices are in fact an action guide from what it is towards what it should be. Evaluating the performance of firms and factories can act as a guideline that paves the way for future decisions, concerning investment, development, and, most importantly, control and supervision. (Tehrani & Rahnama, 2006) 2. Statement of the Problem The history of investment and investors’ performance has indicated that investment outcomes must be evaluated at the end of investment period to determine to what extent the performance of an enterprise is acceptable with regard to selecting the object, how to invest, how to finance, capital management, exploitation of financial and human resources, and the quality of capital control. Prior to the18th century, due to low volume and limited diversification of investments there was no need for performance evaluation and ranking of companies. However, with a rise in the diversification of investments and investment volumes, especially the emergence of new approaches for corporate partnership such as joint stock companies, the quality of capital turnover got more complicated and, thus, the necessity of developing new approaches for evaluating managers’ performance...
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