I have calculated working capital management efficiency of firms belonging to an industry using a new technique. How do I test it and say that it is measuring the efficiency correctly or even better than previous measures?
(1) I guess you must have an understanding that a given set of indicators are well known to be related to efficiency,
(2) if you have calculated the working capital management efficiency of firms using this new technique, then you must go back to the origins of the technique and see how it relates to previous measures. How is it different? and what is the rationale for claiming that this technique is superior?
You could check the correlation of the new efficiency measure with the earlier published measures. Also, see Demerjian et al. (2012) to get a picture of how they test their efficiency measure.
@mohamed You are right that I should go back to origins. I have strong conceptual reasons that the new technique is better but just can't test it emperically. That's why the query
You can build "Utkarsh Goel-measure"-sorted decile (or quintile) portfolios of publically traded companies, calculate total returns, orthogonolize returns for market, size, value, and momentum effects,and test the residuals--i.e., whether higher decile minus lower decile residuals is (significantly) priced by the market.
In some cases, when the new measures are less than previous or the number of efficient units are less than before, It shows that the new technique has more discriminatory power that the previous technique. Of course It is necessary representing Justifiable reasons for the power of discrimination of your technique.