THE RELATIONSHIP BETWEEN STOCK-MARKET RETURNS AND TECHNICAL EFFICIENCY INNOVATIONS - EVIDENCE FROM THE US AIRLINE INDUSTRY

This paper analyzes the association between two firm performance measu res: stock market returns and relative technical efficiency. Using lin ear programming techniques (Data Envelopment Analysis and Free Disposa l Hull), technical efficiencies are calculated for a panel of eleven U S airlines observed quarterly from 1970-1990, A relationship, between efficiency news in a quarter and stock market performance in the follo wing two months, is found. A risky arbitrage portfolio strategy, of bu ying firms with the most positive efficiency news and short-selling th ose with the worst news during this time frame, results in zero beta r isk yet yields annual returns of 17% and 18% for the two methodologies .