Dynamic Trade-Offs In Financial Performances Of Romanian Companies

Our research objectives are twofold: (1) we use the Du Pont model and market ratios such as PER (price-earnings-ratio) and EPS (earnings-per-share) to explain the causes of financial perfor- mances of Romanian companies listed on the Bucharest Stock Exchange for 2002-2009 and to identify the dynamic trade-off among efficiency, profitability and leverage across companies; (2) we develop a cross-sectional analysis of the links between financial statements based and market based indicators, aiming at determining whether fundamental analysis is a significant source of information for equity market investors. We find that over the period Romanian companies’ performances fluctuated signifi- cantly, maybe with the exception of financial leverage and to some extent TAT, regardless of how one measures performance, and that companies were not capable of using the trade-off between profitabil- ity and efficiency to boost their ROA and ROE. Companies’ performance in the stock market is not explained by their operational and financial performance, with the exception of PER and EPS. These results indicate a decoupling between companies’ performance reflected in their financial reports and the performance investors obtain from trading them in the stock market. They also point towards the little importance awarded by for companies’ performance shown in their financial reports.