Financial Performance Evaluation of IT Companies through Two Stage- DEA

Abstract

Data Envelopment Analysis (DEA) is a nonparametric technique for evaluating the relative efficiency of a set of homogenous decision making units (DMU) by using a ratio of weighted sum of outputs to the weighted sum of inputs. There are numerous advances emerged in DEA in recent past based on the ever-changing needs of the business organizations. This study applies a novel two-stage DEA framework where projected or best-practice revenues are calculated in the first stage and are fed as inputs into the second stage. We use this method to examine the operational and stock market efficiency of select IT companies listed on National Stock Exchange in India for period of Ten years from 2007 to 2016. Results indicate that only two companies are on efficient frontier in the both stage I and II. Most companies are neither efficient in stage-I nor in stage-II. We discuss the intuition of the results as well as the implications for practice.