A Note on the Dimensionality of the Firm Financial Performance Construct Using Accounting, Market, and Subjective Measures

Abstract Most research in strategic management operationalizes firm financial performance by using either accountingor market-based measures. Recently, some have suggested that subjective measures may be useful in assessing a firm's financial performance. We argue that there is a theoretical basis for viewing firm financial performance as having a higher order structure consisting of three separate yet distinct dimensions. Using second-order confirmatory factor analysis, we found that while differences exist among accounting, market, and subjective measures of firm financial performance, there is evidence to support the concept of a single underlying construct. While our findings are statistically significant and thus support our hypotheses, the substantive nature of our results suggests that much more research is needed before we fully understand the dimensionality of firm financial performance. Resume Dans la majorite des recherches en gestion strategique, on operationalise la performance financiere d'une entreprise au moyen de mesures fondees sur la comptabilite ou le marche. Recemment, certains ont suggere que des mesures subjectives pourraient etre utiles dans l'evaluation de la performance financiere d'une entreprise. Nous avan,cons l'hypothese qu'il existe une base theorique pour considerer que la performance financiere d'une entreprise consiste en une structure superieure de trois dimensions separees et distinctes. Par l'analyse des facteurs de confirmation secondaires, on a trouve qu'il existe des differences dans les mesures de performance financiere d'une entreprise, que ce soit la mesure de comptabilite, de marche ou subjective, et on peut prouver le concept d'une base unique commune. Bien qu'ils soient statistiquement significatifs et prouvent nos hypotheses, nos resultats suggerent qu'il faut effectuer des recherches plus poussees avant de comprendre tout a fait la dimension de la performance financiere d'une entreprise. Some measure of firm performance is the overwhelmingly dominant dependent variable in strategic management research. Indeed, the very essence of strategic management is that the formulation and implementation of strategies can have a direct effect on firm performance. For example, Barney (1997) viewed strategy as patterns of resource allocations that enable a firm to improve or maintain its performance. Similarly, Bromily (1990) argued that strategy is the description of factors associated with superior performance. Finally, Schendel and Hofer (1979) suggested that firm performance is the time test of any strategy. Given the importance of the role played by performance in strategic management research, the correct operationalization of this construct is critical for the development of valid and reliable research. In this study, we explore one aspect of firm performance: firm financial performance. When financial performance is operationalized, researchers generally use measures of either accounting performance or market performance to indicate a firm's level of financial performance. The dominance of these two views of firm financial performance in the strategic management literature has led to an implicit consensus that the financial performance construct has two dimensions: accounting performance and market performance. More recently, some scholars have begun to use subjective measures when operationalizing firm financial performance (Cannella & Hambrick, 1993; Dess & Robinson, 1984; Fryxell & Wang, 1994), a potential third dimension. This paper explores the dimensionality of the financial performance construct by examining the interrelationships among accounting, market, and subjective measures of firm financial performance. Firm Financial Performance Venkatraman and Ramanujam (1986) noted that firm performance, as defined in the narrowest terms of the construct, "centers on the use of simple outcomebased financial indicators that are assumed to reflect the fulfillment of the economic goals of the firm" (p. …