Journal of Applied Finance & Banking

The Technical Efficiency of Manufacturing Companies on the Nigerian Stock Exchange

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  • Abstract

    The objective of the study is to establish whether quoted manufacturing companies in Nigeria are operating on the production possibility frontier, that is, if they are technically and scale efficient. In pursuance of this, the study adopted the output orientated DEA with input variables as total asset, shareholder’s equity, cost of goods sold and operating expenses, while the output variables are sales/turnover, net profit, return on asset, and return on equity. Output orientated DEAP Version 2.1 package with variable return to scale assumption using multi-stage DEA is employed. The analysis revealed that quoted manufacturing companies in Nigeria are efficient with an average variable return to scale mean score of 85% and scale efficiency mean score of 76%. A breakdown of the results shows that thirty-one companies out of the fifty-eight companies selected for the study are operating on production possibility frontier while the remaining twenty-seven companies are not. It is recommended that the companies that are operating in the region of decreasing return to scale should scale down their inputs while those that are in the region of increasing return to scale should scale up their inputs.