Business | Business Administration, Management, and Operations | Finance and Financial Management | Technology and Innovation
This paper provides a direct estimate of the cost efficiencies of firms in the US solar energy industry. It suggests that the cost efficiency in the industry is associated with the risk-bearing behaviour of firms. Less efficient firms maintain low price-cost margins and high labour–capital ratios in order to compete with their efficient peers. The study then establishes the linkage between cost efficiency and stock returns. It shows that the change in cost efficiency, rather than cost efficiency itself, possesses a stronger explanatory power for stock returns. A buy-and-hold strategy for stock portfolios of different efficiency levels is then analysed. The 3-year returns of the inefficient firm portfolios tend to outperform the efficient firm portfolios. The finding further shows that the improvement in cost efficiency of the inefficient firms is larger than that of the efficient firms. Previous literature has indicated that inefficient firms have higher failure rate, so they are forced to improve cost efficiency.