Regulation, efficiency, and Granger causality

This paper examines whether financial performance Granger causes productive efficiency. Improvements in current period financial performance provide firms with funds to initiate changes that can enhance future period efficiency and profits. Returns to equity and the rate base are used as measures of financial performance. Data Envelopment Analysis is used to compute regulated Farrell measures of cost, technical, and allocative efficiency. The data sample is a panel of 20 US interstate natural gas pipeline companies from 1977 to 1987. Results indicate that improvements in financial performance (productive efficiency) did not statistically contribute to enhancing productive efficiency (financial performance). (C) 2002 Elsevier Science B.V. All rights reserved.