Accounting Choices in Data Envelopment Analysis

Abstract

Due to the increasing availability of large-scale digitalized databases containing summarized financial accounting measures, a growing number of DEA models are using these variables. Where only accounting measures are used, we term these “FinDEA” models. Accounting measures are subject to accounting choices regarding recognition and measurement, which means that they are not necessarily equivalent to direct measures of underlying physical measures more commonly used in DEA. This paper investigates the impact of accounting choices on FinDEA results related to alternative accounting measures of capital. Using both simulated and real-world data, we find that accounting choices impact FinDEA results, with the magnitude influenced by the heterogeneity of the accounting choices and sample sizes. Our results suggest that the variations in accounting choices need to be considered as part of an assessment of the homogeneity of inputs and outputs when designing DEA models using accounting measures.