Market-based performance measures: A shareholder's perspective

Abstract

The concept of performance measurement is an important construct in management and strategic management literature. It is a hotly debated topic and a favourite theme in management research. Since performance measurement is a multi-dimensional construct, there is no consensus as to the choice of independent variable in measuring performance. This article contributes to this debate by presenting the two most popular measures, Price-to-Earnings ratio and the Market-to-Book value, commonly considered as market-based performance measures of profitability from the viewpoint of shareholders. Profitability measures are used as indicators of business financial performance in a multi-dimensional performance model. To assess the financial aspect of firm's performance, researchers generally used either accounting-based or market-based measures. The accounting-based measures are considered back-ward looking and are influenced by accounting standards and management choice of accounting methods. Market-based measures are forward looking and mostly favoured by shareholders. The underlying assumption of the market-based measures is market efficiency, which views stock price as representing the firm's fundamental value. Market based performance measures incorporates all relevant information and thus not limited to only a single aspect of performance unlike the accounting measures. The theoretical basis for using market-based performance measures is that they reflect a firm's financial performance more accurately compared to the accounting-based measures.