Using accounting measures and data envelopment analysis to measure firm performance: the effect of variability in prices

Purpose - Recent accounting research using data envelopment analysis (DEA) measures firm performance using accounting measures from annual reports, which are readily available from electronic databases (e.g. Demerjianet al., 2013; Schwab, 2022). This approach differs from conventional DEA studies that analyse productivity and use internal data about physical quantities of production inputs and outputs. Using accounting measures instead of physical measures presents challenges as accounting measures aggregate physical quantities using unknown but fluctuating prices. This raises the issue of what these DEA models measure. This study aims to examine how price variability influences DEA results when measuring firm performance and identifies implications for future accounting research. Design/methodology/approach - This study uses a Cobb–Douglas function to simulate physical data for input and output quantities, which are then priced to form accounting measures that incorporate different levels of price variability. These simulated accounting data are used to estimate DEA results. The results using physical data and accounting data are compared to identify the impact of increasing levels of price variation and sample size on the comparability of DEA results. Findings - The study confirms the theoretical argument that accounting measures can be used in DEA to measure productivity when prices are identical across a sample of firms. Moreover, where price variability is low, large samples can also reliably estimate productivity when using accounting measures. This measure of productivity fundamentally underpins financial performance and provides a new dimension of firm performance that can be measured by accounting measures. However, where price variability is high, DEA using accounting measures cannot estimate productivity and can only be used for benchmarking financial performance. In this case, DEA provides an alternative measure for financial performance, which incorporates multiple dimensions and can extend traditional financial analysis approaches by providing a more comprehensive measure. Originality/value - Despite calls for investigation (Camanhoet al., 2024; Färeet al., 2017; Zelenyuk, 2020), evidence has been scarce regarding the impact of price variability when using accounting measures in DEA. Understanding this impact is key to understanding the nature of DEA results produced using accounting measures, as this can affect the interpretation and use of those results. This study is the first to focus on the impact of price variability on accounting measures within DEA and suggests new avenues for accounting research using this performance measurement method.