Searching for an effective accounting-based score of firm performance: a comparative study between different synthesis techniques

The need for an effective comprehensive financial performance score of the firm derived from accounting-based variables is increasingly felt in the stream of empirical research on relationships between financial performance and other dimensions of corporate per- formance. The solution to this problem must be pursued in literature on statistical-math- ematical techniques to synthesize financial performance through financial ratios derived from financial statements. Until now, however, studies have mainly focused on math- ematical modeling and ranking of companies, without using appropriate benchmarks to verify the relevance of the scores obtained and to establish, from a comparative perspec- tive between different techniques, which one provides the assessment that best summarizes financial performance. To make a contribution to this research gap, using a sample of 845 companies observed from 2014 to 2020, we compared Data Envelopment Analysis and Principal Component Analysis with two other applications based on new methodologies derived from the Multi-Criteria Decision Methods: The Technique for Order Preference by Similarity to Ideal Solution (TOPSIS) and Grey Relational Analysis. We developed the 4 techniques on a set of 9 financial ratios expressive of profitability and operating efficiency, solvency, and liquidity, and Tobin’s q was used as a benchmark to compare the results pro- vided by the 4 techniques and identify the best performing one. We found that TOPSIS is the most effective methodology for synthesizing an effective accounting-based score of the firm’s financial performance.