The Relation Between Productivity Measures And Financial Information

Abstract

The principal purpose of this thesis is to examine the existence of the relation between technical efficiency and financial information based on published annual reports. Also, the effect of annual changes in productivity to changes in financial information is of interest in the study. The distinction between efficiency change and technological change is made for evaluation of productivity improvements. The empirical evidence from the airline industry is presented. 35 airlines from 25 countries for the period 1991 through 1999 are included into the study. The support for relation between technical efficiency and operating expenditures is found. The results obtained suggest that decomposing of productivity change into technical change and efficiency change does provide supplementary information. The negative relationship between change in operating expenditures and technological change is established. Moreover, we found operating expenditures to be negatively related to MTFP index. This evidence is confirmed with results obtained by Holmen et al (1998). The study does not reveal any reflection of productivity changes into information on earnings or cash flow. Thus, the priority of cash flow information as well as the reverse has no support from this empirical evidence. According to the demand, and, consequently, revenue movements within the industry, the results obtained in the study could be explained by a more clearly defined (and less revenue-influenced) connection between costs and productivity measures in comparison with productivity measures and earnings or cash flow. The timing of reaction for financial items on productivity changes is investigated. The assumed lag of one year does not provide any evidence on the relation of interest. Rather, the immediate reflection of productivity changes into financial information within the year is empirically supported.