Discussion of Firm Efficiency Level and Equity Returns

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Discussion of Firm Efficiency Level and Equity Returns

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The term "efficient" firm is widely used in economics. For example, an efficient firm is the one producing at Marginal Cost = Marginal Revenue. However, in finance, an "efficient" firm has no specific meaning. We hear efficient market but not efficient firm. Primarily because of two reasons. First, efficiency or MC=MR is difficult to estimate in finance. Second, so what if the firm is efficient? Why should an investor care? Economic theory never told us anything about what will happen next. Maybe a firm is efficient right now will not be in the future. Or if the firm is efficient......

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