The Measurements of Firm Performances Dimensions

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The Measurements of Firm Performance’s Dimensions
Article in Asian Journal of Finance & Accounting · February 2014

DOI: 10.5296/ajfa.v6i1.4761
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Asian Journal of Finance & Accounting
ISSN 1946-052X
2014, Vol. 6, No. 1
The Measurements of Firm Performance’s Dimensions

Ebrahim Mohammed Al-Matari
Faculty of Business and Economics, Ammran University
Yemen and Othman Yeop Abdullah Graduate School of Business
University Utara Malaysia, Malaysia
E-mail: ibrahim_matri@yahoo.com
Abdullah Kaid Al-Swidi

Othman Yeop Abdullah Graduate School of Business, University Utara Malaysia, Malaysia
E-mail: swidi@uum.edu.my
Faudziah Hanim Bt Fadzil

Othman Yeop Abdullah Graduate School of Business, University Utara Malaysia, Malaysia
E-mail: fhanim@uum.edu.my
Received: Nov. 8, 2013 Accepted: January 25, 2014 Published: June 1, 2014
doi:10.5296/ajfa.v6i1.4761 URL: http://dx.doi.org/10.5296/ajfa.v6i1.4761
Abstract
The main purpose of this study was to review the measurements that are related to the
corporate governance. A close look at the literature of corporate governance and firm
performance reveals that different measures have been used by the researchers to measure the
performance. They classified those measurements into accounting-based and market-based
indicators. Performance measurement has great significance in effective management of an
organization and in the enhancement of the processes since only measurable things is
manageable. Hence, the enhancement of the organizational performance requires some
measurements to determine the impact of the level of organizational effectiveness upon
business performance. This study can act as a reference to the researchers who are concerned
with the firm performance measurements.
Keywords: Performance, Accounting-based measurement, Market-based measurement
24 www.macrothink.org/ajfa
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1. Introduction
Nowadays, the performance of companies is the first to be evaluated by investors around the
world as currently, the world has become smaller in a sense that businesses can be conducted
anywhere. Globalization facilitates business activities and high performance and in
eliminating the barriers existing in corporate trade and financial investment, businesses can
have a wider opportunity to grow. In addition, with the highest spread of generation in
technology, people who are interested and concerned in achieving their jobs from anywhere
are encouraged to look for any company around the world that shows high performance for
investment. Thus, the performance of the company is the most important to encourage the
people to come to it. And therefore, people who are responsible for running firms must
improve firm performance through new plan and procedures to update its operations and
transactions during its life cycle. Regarding to the importance of this subject of performance
of firms, this study considers the effect of performance in the business environment in
consistent to some measurement such as accounting-based measurement and market-based
measurement as discussed in the coming sections.
2. Firm Performance Definitions
Performance measurement refers to the process of measuring the action’s efficiency and
effectiveness (Neely, Gregory & Platts, 1995). Performance measurement is the transference
of the complex reality of performance in organized symbols that can be related and relayed
under the same circumstances (Lebas, 1995). In the current business management,
performance measurement is considered to be in a more critical role compared to
quantification and accounting (Koufopoulos, Zoumbos & Argyropoulou, 2008). This is
consistent with Bititci, Carrie and McDevitt (1997) who described performance management
as a process wherein the organization manages its performance to match its corporate and
functional strategies and objectives.
Additionally, the firm’s value can be described as the benefits stemming from the firm’s
shares by the shareholders (Rouf, 2011). The company’s performance can be viewed from the
financial statement reported by the company. Consequently, a good performing company will
reinforce management for quality disclosure (Herly & Sisnuhadi, 2011).
2.1 Firm Performance Importance
Performance measurement is critical for effective management of any firm (Demirbag, Tatoglu,
Tekinus and Zaim, 2006). The process improvement is not possible without measuring the
outcomes. Hence, organizational performance improvement requires measurements to identify
the level to which the use of organizational resources impact business performance (Gadenne
and Sharma, 2002; Madu, Aheto, Kuei and Winokur, 1996).
The firm’s success is basically explained by its performance over a certain period of time.
Researchers have extended efforts to determine measures for the concept of performance as a
crucial notion. Finding a measurement for the performance of the firm enables the
comparison of performances over different time periods. Nevertheless, no specific
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measurement with the ability to measure every performance aspect has been proposed to date
(Snow & Hrebiniak, 1980).
Performance of a firm is significantly impacted by corporate governance and if the functions
are appropriately established for the corporate governance system, it attracts investment and
helps in maximizing the company’s funds, reinforcing the company’s pillars and this will
result in the expected increase in firm performance. In other words, an effective corporate
governance protects against probable financial challenges and facilitates remarkable growth
and therefore, corporate governance plays a key role in the growth of the firm performance.
Currently the impact of corporate governance upon the general firm well-being has been
examined (Ehikioya, 2009).
2.2 Firm Performance Measurement
Measurement of performance can offer significant invaluable information to allow
management’s monitoring of performance, report progress, improve motivation and
communication and pinpoint problems (Waggoner, Neely & Kennerley, 1999). Accordingly,
it is to the firm’s best interest to evaluate its performance. Nevertheless, this is a management
area characterized by lack of consistency as to what constitutes organizational performance.
According to Cameron and Whetten (1983), the importance of business performance in
strategic management can be categorized into three dimensions; theoretical dimension,
empirical dimension and managerial dimension.
Moreover, performance measurement is critical in performance management. Through the
measurement, people can create simplified numerical concepts from complex reality for its
easy communication and action (Lebas, 1995). The simplification of this complex reality is
conducted through the measurement of the prerequisites of successful management. On a
similar note, Bititci et al. (1997) contended that performance measurement is at the core of
the performance management process and it is of significance to the effective and efficient
workings of performance management.
In theory, the concept of performance forms the core of strategic management and
empirically, most strategy studies make use of the construct of business performance in their
attempt to examine various strategy content and process issues. In management, the
significance of performance is clear through the many prescriptions provided for performance
enhancement. Research dedicated to governance structures relationship with financial
performance was highly dependent on accounting-based indicators. Some studies have
adopted individual measurements (accounting-based or market-based measurements).
Although there are widely measurements of performance with many which it related to much
fields but we tried to execute this measurement regarding to corporate governance. Based on
our reading of much article that interconnection to corporate governance that we will provide
almost of measurements of firm performance form different perspective as it explains follows.
The countless number of ways has been brought forward to measure financial performance
and among them are: measurement of performance as the level of Return on Assets (ROA),
Return on Equity (ROE), Tobin-Q, Profit Margin (PM), Earnings Per Share (EPS), Divided
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Yield (DY), Price-Earnings Ratio (PE), Return on Sales (ROS), Expense to Assets (ETA),
Cash to Assets (CTA), Sales to Assets (STS), Expenses to Sale (ETS), Abnormal returns;
annual stock return, (RET), Operating Cash Flow (OCF), Return on Capital Employed
(ROCE), Labor productivity (LP), Critical business Return on Asset (CROA), Cost of Capital
(COC), Market Value Added (MVA), Operation Profit (OP), Return on Investment (ROI),
Market-to-book value (MTBV), Log of market capitalization, LOSS, Growth in Sales (GRO),
Stock Repurchases, Sales Per Employee(SPE), Return on revenue (ROR), Output per staff
(OPS), Cost Per Service Provided (CPSP) and Cost per Client Served (CCS), Superior to
cumulative abnormal returns (CARs), Profit Per Employee (PPE) and Return on Fixed Assets
(ROFA) etc. Most of these proposed measures have been utilized by studies regarding
governance.
Recently, special attention has been dedicated to determining the corporate governance
effectiveness through different measurement of firm performance, one that is related to the
production process, namely technical efficiency (e.g. Sheu & Yang, 2005; Bozec & Dia, 2007;
Destefanis & Sena, 2007; Lin et al., 2009; & Garcia-Sanchez, 2010). This is because the main
element of business organization is its operation function which refers to the transformation
of inputs into outputs, and wherein efficiency is very significant (Sheu & Yang, 2005).
Along the same line, Hill and Snell (1989) contended that the advantage of making use of
technical efficiency is its constitution of accurate measure and the disadvantages of other
measures such as financial ratios and Tobin’s Q as firm performance measure; the latter two
are very sensitive to the differences among accounting methods/manipulation of accounting
profit (Barth, La Mont, Lipton & Spelke, 2005).
In this section will categorize these measurements to two classifications such as accounting
based measurement and marketing based measurement as it is explained following:
2.2.1 Accounting-Based Measurements
Accounting-based measurement is generally considered as an effective indicator of the
company’s profitability and the business when compared to benchmark rate of return equal to
the risk adjusted weighted average cost of capital. The accounting based measurement
indicators to the profitability of firms on the short term in the past years such as (ROA),
(ROE), (ROS), (PM), (ROI), (OCF), (EPS), (OP), (GRO), (ROCE), (ETA), (CTA), (STS)
and others as we will offer below.
The profit measure is criticized for its backward-looking element and its partial estimation of
future events in terms of depreciation and amortization. The rate of profit is measured by the
accountant, limited by standards established by the profession and is hence impacted by the
accounting practices like the various methods employed for the assessment of tangible and
intangible assets (Kapopoulos & Lazaretou, 2007).
Also, ROA, as an accounting-based measurement, gauges the operating and financial
performance of the firm (Klapper & Love, 2002). The measurement is such that the higher
the ROA, the effective is the use of assets to the advantage of shareholders (Haniffa &
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Huduib, 2006). Higher ROA also reflects the company’s effective use of its assets in serving
the economic interests of its shareholders (Ibrahim & AbdulSamad, 2011).).
According to Hutchinson and Gul (2004) and Mashayekhi and Bazazb (2008),
accounting-based performance measures present the management actions outcome and are
hence preferred over market-based measures when the relationship between corporate
governance and firm performance is investigated. As a result, a company showing a positive
performance through ROA, it indicates its achievement of prior planned high performance
(Nuryanah & Islam, 2011). Contrastingly, a negative person indicates failure of the planned
high performance which requires revision of plans to enhance short-term performance. The
negative performance results in investors’ (local and foreign) loss. The company therefore
has to update its objectives from time to time if it is desirous of competing in the market
place. The rest of the section provides extensive summaries of all accounting-based
measurements tested by researchers.
Table 1. Summary of Accounting-Based Measurements

Factors Authors How to
measure a
factor
Return Al Manaseer et al., (2012),Uwalomwa and Olamide (2012), Karaca By net income
on and Ekşi (2012),Chari, Chen and Dominguez (2012), Rouf over total
Assets (2011),Swamy (2011), Khatab et a., (2011), Ibrahim and assets at the
(ROA) AbdulSamad (2011),Chaghadari (2011), MirantyHerly and end of the year
Sisnuhadi (2011),Heenetigala and Armstrong (2011),Valenti, Luce
and Mayfield (2011), Azam, Usmani and Abassi (2011), Khan,
Nemati and Iftikhar (2011), Pandya (2011), Geletkanycz and Boyd
(2011), Junarsin (2011), Bhagat, Bolton and Subramanian (2011),
Prabowo and Simpson (2011), Najid and Abdul Rahman (2011),
Shahab-u-Din and Javid (2011), Fazlzadeh, Hendi and Mahboubi
(2011), Lin Chang-Jui (2011), Chiang and Lin (2011), Chahine and
Safieddine (2011), Lin, Liao and Chang (2011), Liang, Lin and
Huang (2011), Herri (2011), Ghahroudi (2011), Chugh, Meador
and Kumar (2011), Reddy, Locke and Scrimgeour (2010), Ibrahim,
Rehman and Raoof (2010), Shao (2010), Pissaris, Jeffus and
Gleason (2010), Gurbuz and Aybars (2010), O`Connell and Cramer
(2010), Chowdhury ( 2010), Chamberlain (2010), Larmou and
Vafeas (2010), Millet-Reyes and Zhao (2010), Evans, Nagarajan
and Schloetzer (2010), Liargovas and Skandalis (2010), Bøhren and
Strøm (2010), Muravyev, Talavera, Bilyk and Grechaniuk (2010),
Mandacı and Gumus (2010), Bauer, Eichholtz and Kok (2009),
Chidambaran, Palia and Zheng (2009), Irina and Nadezhda (2009),
Jackling and Johl (2009), Bhagat and Bolton (2009), Hsu, Hsiao
and Li (2009), Bauwhede (2009), Singh and Gaur (2009), Ehikioya
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(2009), Bektas and Kaymak (2009), Hutchinson and Zain (2009),

Omrana Mohammed, Bolbol and Fatheldinc (2008), Bhagata and
Bolton (2008), Mashayekhi and Bazazb (2008), Abdullah, Shah
and Hassan (2008), Juras and Hinson (2008), Harjoto and Jo
(2008), Kubo and Saito (2008), Chung, Kim, Kim and Choi (2008),
Koufopoulos, Zoumbos and Argyropoulou (2008), Dey (2008),
Ting (2008), Kyereboah-Coleman (2007), Wei (2007), Dahya and
McConnell (2007), Kim and Yoon (2007), Filatotchev,
Isachenkova and Mickiewicz (2007), Premuroso and Bhattacharya
(2007), Sánchez-Ballesta and García-Meca (2007), MoIlah and
Talukdar (2007), Cho and Kim (2007), Garcia, González and
Ortega (2006), Kyereboah-Coleman and Biekpe (2006), Tsai,
Hung, Kuo and Kuo (2006), Barontini and Caprio (2006), Douma,
George and Kabir (2006), Firth, Fung and Rui (2006), Joher and
Ali (2005), Sanda, Mikailu and Garba (2005), Xu, Zhu and Lin
(2005), Bozec (2005), Filatotchev, Lien and Piesse (2005),
Dhnadirek and Tang (2003), Jong, Gispert, Kabir and Renneboog
(2002).
Return Al Manaseer et al., (2012),Obiyo and Lenee (2011),Rouf (2011), By Profit after
on Swamy (2011), Ibrahim and AbdulSamad (2011),Yasser, Entebang tax / Total
Equity and Mansor (2011), Dar, Naseem, Rehman and Niazi (2011), equity shares
(ROE) Chaghadari (2011), Heenetigala and Armstrong (2011),Valenti, in issue
Luce and Mayfield (2011), Azam, Usmani and Abassi (2011), Khan,
Nemati and Iftikhar (2011), Pandya (2011), Najid and Abdul
Rahman (2011), Shahab-u-Din and Javid (2011), Bozcuk (2011),
Lin (2011), Chiang and Lin 2011), Chahine and Safieddine (2011),
Lin, Liao and Chang (2011), Khan and Javid (2011), Herri (2011),
Chugh, Meador and Kumar (2011), Ibrahim, Rehman and Raoof
(2010), Shao (2010), Chamberlain (2010), Larmou and Vafeas
(2010), Uadiale (2010), Liargovas and Skandalis (2010), Bauer,
Eichholtz and Kok (2009), Hsu, Hsiao and Li (2009), Bauwhede
(2009), Singh and Gaur 2009), Ehikioya (2009), Omrana, Bolbol
and Fatheldinc (2008), Yue, Lan and Jiang (2008), Mashayekhi and
B a z a z b (2008), O Kajola (2008), Abdullah, Shah and Hassan
(2008), Juras and Hinson (2008), Ting (2008), Adjaoud, Zeghal and
Andaleeb (2007), Premuroso and Bhattacharya (2007), Luan and
Tang (2007), Sánchez-Ballesta and García-Meca (2007), MoIlah
and Talukdar (2007), Kyereboah-Coleman and Biekpe (2006),
Makri, Lane and Gomez-Mejia (2006), Sanda, Mikailu and Garba
(2005), Earle, Kucsera and Telegdy (2005), Brown and Caylor
(2004), Leng (2004).
Return Geletkanycz and Boyd (2011), Ghahroudi (2011), Bøhren and By it
on Sales Strøm (2010), Muravyev, Talavera, Bilyk and Grechaniuk (2010), determined by
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(ROS) Singh and Gaur (2009), Filatotchev, Isachenkova and Mickiewicz dividing net
(2007), Sánchez-Ballesta and García-Meca (2007), Firth, Fung profit by sales.
and Rui (2006), Bozec (2005).
Return Adjaoud, Zeghal and Andaleeb (2007). By the benefit
on (return) of an
Investm investment is
ent divided by the
(ROI) cost of the
investment.
Profit Al Manaseer et al., (2012), Obiyo and Lenee (2011),Yasser, It can estimate
Margin Entebang and Mansor (2011), Dar, Naseem, Rehman and Niazi by Profit after
(PM) (2011), Azam, Usmani and Abassi (2011), Junarsin (2011), Jiang tax / Turnover.
and Peng (2011), Ghahroudi (2011), Reddy, Locke and Scrimgeour
(2010), Bauer, Eichholtz and Kok (2009), Bauwhede (2009), O
Kajola (2008), Premuroso and Bhattacharya (2007), Wei (2007),
Brown and Caylor (2004).
Operati Millet-Reyes and Zhao (2010). It can evaluate
ng Cash by net Income
Flow depreciation
(OCF) Expense /
Total Assets.
Earning Al Manaseer et al., (2012), Junarsin (2011), Tsegba and Ezi-Herbert It could
s per (2011), Lin, Liao and Chang (2011), Yue, Lan and Jiang, Luan evaluate by is
Share (2008), Mashayekhi and B a z a z b (2008), Ting (2008), Adjaoud, net income
(EPS) Zeghal and Andaleeb (2007), Filatotchev, Lien and Piesse (2005). divided by
total shares.
Operati Harjoto and Jo. It can be

on calculated by
Profit operating
(OP) income before
depreciation to
total asset
Growth Herri (2011), Firth, Fung and Rui (2006), Brown and Caylor It can be
in Sales (2004). calculated by
(GRO) dividing the
difference
between
current sales
and previous
year’s sales
volumes by
previous year’s
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2014, Vol. 6, No. 1
sales volume.
Return Uadiale (2010), Filatotchev, Lien and Piesse (2005). it can analyze
on by the profit
Capital before tax /
Employ total issued
ed capital.
(ROCE)
Expense Najid and Abdul Rahman (2011). It can be
to calculated by
Assets Total expenses
(ETA) / Total assets.
Cash to Najid and Abdul Rahman (2011). It can
Assets measurement
(CTA) by Cash / Total
assets
Sales to Najid and Abdul Rahman (2011). It can calculate
Assets by Total Sales
(STS) / Total assets.
Expense Najid and Abdul Rahman (2011). It can be
s to Sale designed by
(ETS) Total Expenses
/ Total Sales.
Labor Muravyev, Talavera, Bilyk and Grechaniuk (2010), Fidrmuc and It can be
Product Fidrmuc (2007) and Sheu and Yang (2005). measured by
ivity the ratio of
(LP) sales to the
number of
workers
employed.
Cost of Kim and Yoon (2007). It can be
Capital calculated by
(COC) interest
expense + cash
dividends /
revenue.
LOSS: Firth, Fung and Rui (2006). It can calculate
by the net
operating loss.
Return Dhnadirek and Tang (2003). It can measure
on by net profit
Revenu after
e (ROR) taxes/revenues.
Profit Fidrmuc and Fidrmuc 2007. This is factor
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per can calculate

employe by the total
e (PPE) sales less the
costs over the
total number of
employees
Return Fidrmuc and Fidrmuc 2007. This is factor
on can calculate
Fixed by the total
Assets sales less the
(ROFA) total costs over
the fixed
assets.
Table 2. The Account-Based Measurement

Return on Assets (ROA) 88
Return on Equity (ROE) 52
Return on Sales (ROS) 9
Return on Investment (ROI) 1
Profit Margin (PM) 15
Operating Cash Flow (OCF) 1
Earnings per Share (EPS) 9
Operation Profit (OP) 1
Growth in Sales (GRO) 3
Return on Capital Employed (ROCE) 1
Expense to Assets (ETA) 1
Cash to Assets (CTA) 1
Sales to Assets (STS) 1
Expenses to Sale (ETS) 1
Labor Productivity (LP) 3
Cost of Capital (COC) 1
Return on Revenue (ROR) 1
Profit per employee (PPE) 1
Return on Fixed Assets (ROFA) 1
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Figure 1. The Account-Based Measurement
Based on Figure 1, shows the ratio of highest measure of account-based measurements

examined with corporate governance. The first account-based measurement is return on
assets (ROA) with 46% followed by Return on Equity (ROE) with 27% of total ratio, and
Profit Margin (PM) with 8%. And hence, ROA is uniquely measurement of the profit before
tax, divided by total assets and it is easy to obtain from the firm’s annual report.
2.2.2 Market-Based Measurements
The second type of measurement is the market-based measurement which is categorized as
long term like Tobin’s Q, (MVA), (MTBV), (RET), (DY) and among others as discussed in
the following paragraphs. The market-based measurement is characterized by its
forward-looking aspect and its reflection of the expectations of the shareholders concerning
the firm’s future performance, which has its basis on previous or current performance (Wahla,
ShahSyed & Hussain, 2012; Shan & McIver Ron, 2011; & Ganguli & Agrawal, 2009).
Tobin’s Q refers to a traditional measure of expected long-run firm performance (Bozec, Dia
& Bozec, 2010). The employment of market value of equity may present the firm’s future
growth opportunities which could stem from factors exogenous to managerial decisions and
this is indicated by the companies level (Shan & McIver, 2011; Demsetz & Villalonga, 2001).
In addition, a high Q ratio shows success in the a way that the firm has leveraged its
investment to develop the company that is valued more in terms of its market-value compared
to its book-value (Kapopoulos & Lazaretou, 2007).
Moreover, market-based expectations for firm performance may result in management
incentive to modify their holdings on the basis of their expectations of the future performance
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of the firm (Sánchez-Ballesta & García-Meca, 2007). As a result, when the company’s
market-based performance is higher than the results of Tobin’s Q, this indicates that the
company has succeeded in achieving its planned high performance (Nuryanah & Islam, 2011)
but if it is less than Tobin’s Q, then the company needs to revise its plans to enhance its
short-term performance. The negative performance leads to investor’s loss (local and foreign)
and hence, it is important for the company to update its objectives from time to time if it is
desirous of competing in the market place.
Now, we provide instances of studies conducted all over the world dedicated to the study of
corporate governance dimensions relation with firm performance.
Table 3. Summary of Marketing-Based Measurements

Factors Authors How to measure
a variable
Tobin-Q Karaca and Ekşi (2012),Wahla, Shah and Hussain (2012), Kang It can calculate
and Kim (2011), Ibrahim and AbdulSamad (2011),Herly and by the ratio of
Sisnuhadi (2011),Heenetigala and Armstrong (2011), Shan and the market
McIver (2011), Saibaba and Ansari (2011), Nuryanah and Islam capitalization
(2011), Bhagat et al., (2011), Najid and Abdul Rahman plus total debt
(2011), Shahab-u-Din and Javid (2011), Bozcuk (2011), Lin divided by total
(2011), Tsegba and Ezi-Herbert (2011), Valenti, Luce and asset of the
Mayfield (2011), Lin, Liao and Chang (2011), Liang, Lin and company.
Huang (2011), Garcı´a-Meca and Sa´nchez-Ballesta (2011),
Reddy, Locke and Scrimgeour (2010), Ghazali (2010), Kota
and Tomar (2010), O`Connell and Cramer (2010), Chowdhury
( 2010), Larmou and Vafeas (2010), Millet-Reyes and Zhao
(2010), Leung and Horwitz (2010), Bøhren and Strøm (2010),
Hu, Tam and Tan (2010), Mandacı and Gumus (2010),
Mizuno (2010), Bauer, Eichholtz and Kok (2009),
Chidambaran, Palia and Zheng (2009), MacAulay, Dutta,
Oxner, Mary and Hynes (2009), Irina and Nadezhda (2009),
Jackling and Johl (2009), Bhagat and Bolton (2009), Siala,
Adjaoud and Mamoghli (2009), Shakir (2009), Amran and
Ahmad (2009), Hsu, Hsiao and Li (2009), Switzer and Tang
(2009), Ehikioya (2009), Bektas and Kaymak (2009), Ganguli
and Agrawal (2009), Lee (2009), Omran, Bolbol and Fatheldin
(2008), Yue, Lan and Jiang, Luan (2008), Bhagata and Bolton
(2008), Abdullah, Shah and Hassan (2008), Lee, Lev and
Yeo (2008), Harjoto and Jo (2008), Schmid and
Zimmermann (2008), Dey (2008), Ting (2008), Sing and
Sirmans (2008), Kyereboah-Coleman (2007), Khanchel
(2007), Wei (2007), Garg (2007), Kapopoulos and Lazaretou
(2007), Choi, Park, and Yoo (2007), Mura (2007),
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Sánchez-Ballesta and García-Meca (2007), Barontini and

Caprio (2006), Douma, George and Kabir (2006),
Albert-Roulhac and Breen (2005), Dwivedi and Jain
(2005), Sanda, Mikailu and Garba (2005), Belkhir (2005),
Florackis (2005), Brown and Caylor (2004), Black, Jang and
Kim (2003), Jong, Gispert, Kabir and Renneboog (2002),
Lemmon and Lins (2001).
Market Kula (2005) and Abdullah, Shah and Hassan (2008). It can be
Value calculated by It
Added is the difference
(MVA) between the
Market Value
and book value
of Equity.
Market-t Al Farooque, Zijl, Dunstan and Karim (2007), Cordeiro, It can be
o-Book Veliyath and Romal (2007), Black and Kim (2007),Yawson calculated by
Value (2006), Maury (2006) and Fairchild and Li (2005). Market value of
(MTBV) equity / book
value of equity.
Abnorma O`Connell and Cramer (2010), Kim and Yoon (2007), Firth, It can calculate
l Returns; Fung and Rui (2006), Jong, Gispert, Kabir and Renneboog by annual
Annual (2002). abnormal returns
stock from the market
return, model.
(RET)
Dividend Obiyo, Ofurum and Lenee (2011), Brown and Caylor (2004), It can evaluate
Yield Leng (2004). by the dividend
(DY) per shared / price
per share.
Price-Ear Valenti, Luce and Mayfield (2011), Ehikioya (2009), Sanda, It can measure
nings Mikailu and Garba (2005). by measured as
Ratio the ratio of price
(PE) per share to
earnings per
share.
Log of MoIlah and Talukdar (2007). -----------
Market
Capitaliz
ation
Stock Brown and Caylor (2004). It can calculate
Repurcha by (Purchases of
ses Common and
Preferred Stock
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2014, Vol. 6, No. 1
(Compustat
Annual Item
115) – Decrease
in Preferred
Stock (from
previous year)) /
Market Value of
Equity.
Superior Braun and Sharma (2007). It can calculate
to by the long-term
Cumulati abnormal stock
ve returns.
Abnorma
l Returns
(CARs)
Table 4. The Market-Based Measurement

Tobin-Q 74
Market Value Added (MVA) 2
Market-to-Book Value (MTBV) 6
Abnormal Returns; Annual stock return, (RET) 4
Dividend Yield (DY) 3
Price-Earnings Ratio (PE) 3
Log of Market Capitalization 1
Stock Repurchases 1
Superior to Cumulative Abnormal Returns (CARs) 1
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Figure 2. The Market-Based Measurement
Based on Figure 2, the ratio of highest measure of market-based measurements examined

with corporate governance is displayed by Tobin-Q with 78% followed by Market-to-Book
Value (MTBV) with 7% of total ratio. Abnormal Returns and Annual stock return (RET)
displayed 4%. This indicates that Tobin`s Q is widely used to measure the ratio of the market
capitalization plus total debt divided by total asset of the company. This measure is fixable in
obtaining the source of company from Data stream.
2.2.3 Others Measurements
Some measurements cannot capitalize under either accounting or marketing measurement
such as output per staff, cost per service provided and cost per client served; these factors
were tested by Ii, Kankpang and Okonkwo (2012).
Based on the above provision of the advantages of accounting and market based
measurements, there are some distinct differences between the two. Demsetz and Villalonga
(2001) highlighted two crucial aspects where two measures differ; first, accounting profit
ratios are backwards looking measures (Shan & McIver, 2011), whereas Tobin’s Q is
described as a forward-looking measure of firm performance. In this situation, accounting
profit ratios are impacted by accounting practices and they stress on management outcome.
Tobin’s Q also presents the investors assigned value to the firm’s tangible and intangible
assets on the basis of predicted revenue and streams of costs.
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2014, Vol. 6, No. 1
The second difference lies in the actual measuring performance. Accounting profit measures
are often employed by accountants limited by accounting standards and accountability. The
Tobin’s Q measure is frequently used by investors limited by their perceptions (acumen,
optimism and pessimism). Tobin’s Q is favored by several economists who are better
informed of the market constraints and not the accounting constraints (Demsetz & Villalonga,
2001).
In theory, researchers revealed that the accounting based measurements like ROA, ROE,
profit margin and others are used for the short-term performance of the firm while the
market-based performance of the firm is gauged through Tobin’s Q as a representation of
future long-term performance. Therefore, the integration between the two provides a clear
picture of the firm. Despite the widely used aspect of the measurements, results are still
inconclusive. While some found a positive relationship between corporate governance and
firm performance through accounting and market-based measurement, others revealed a
negative relationship between corporate governance and firm performance.
3. Conclusion
The current performance of companies is the first to be evaluated by investors all over the
globe. Currently, the world has become smaller in terms of the opportunities to conduct
business anywhere around the world. Globalization has facilitated business high performance
as economic globalization helps people the world over. By eliminating the barriers to
corporate trade and financial investments, development and growth are realized and better
opportunities can be paved. Performance measurement is very crucial for the organization’s
effective management and enhancement of the process is impossible without outcome
measurement. Hence, organizational performance requires measures to identify the effect of
organizational recourses upon business performance.
This study is unique to offer all measures to study the relationship between corporate
governance and firm performance. It is the first of its kind to conduct a review of all
measures of firm performance. We dedicate our effort to conduct a review of the majority of
studies studying all the measurements of firm performance with corporate governance dated
from 2000 to 2012.
This study suggests that future research should use a combination measure of the firm
performance that both accounting and market based measures to accurately measure the firm
performance. In fact, the accounting –based measure can reflect the past performance of the
company while the market-based indicators help to anticipate the future performance.
Moreover, although there are many measurements for firm performance as we mentioned
above, some have been widely used such as Return on Assets (ROA), Return on Equity
(ROE), Return on Sales (ROS), Profit Margin (PM), Earnings per Share (EPS), Tobin-Q,
Market Value Added (MVA) and Market-to-Book Value (MTBV), while others are not
widely used. It is, therefore, recommended that future researchers should use other measures
such as Operation Profit (OP), Growth in Sales (GRO), Return on Capital Employed (ROCE),
Expense to Assets (ETA), Cash to Assets (CTA), Cost of Capital (COC), Return on Revenue
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(ROR), Return on Fixed Assets (ROFA), Dividend Yield (DY), Stock Repurchases and
others to measure the firm performance.
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The Measurements of Firm Performance’s Dimensions

Article in Asian Journal of Finance & Accounting · February 2014

Ebrahim Mohammmed Al-Matari Abdullah Kaid Al-Swidi

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The Measurements of Firm Performance’s Dimensions

Abdullah Kaid Al-Swidi

Faudziah Hanim Bt Fadzil

Table 1. Summary of Accounting-Based Measurements

(2009), Bektas and Kaymak (2009), Hutchinson and Zain (2009),

Operati Harjoto and Jo. It can be

per can calculate

Table 2. The Account-Based Measurement

Figure 1. The Account-Based Measurement

Based on Figure 1, shows the ratio of highest measure of account-based measurements

Table 3. Summary of Marketing-Based Measurements

Sánchez-Ballesta and García-Meca (2007), Barontini and

Table 4. The Market-Based Measurement

Figure 2. The Market-Based Measurement

Based on Figure 2, the ratio of highest measure of market-based measurements examined

Ehikioya, B. (2009). Corporate governance structure and firm performance in developing

International Journal of Managerial Finance, 6(3), 190–219.

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