The Most Popular Variables For Performance Measurement Are Return On Assets Accounting Essay

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Accounting and market based performance are the most common types of performance measurement in assessing business performance. In accounting-based performance, annual report, which comprises income statements, balance sheets and statements of changes in financial position are the source of information to analyse company's financial performance for one particular financial year. This approach is very important for company's stakeholders such as potential investors since the indicator can help them in making investment decisions. It also vital in helping the company's shareholders to assess how well the company performed in market place in order to make decisions on management and employees rewards, setting suitable plans to sustain the good momentum or even take drastic approaches for company to remain in business. The accounting-based performance also helps manager to effectively plan and control in order to achieve the objectives of the company. For example, according to Thompson & Yeung (2001), return on equity (ROE) as one of the accounting-based measurements can accommodate the effect of different accounting procedures across industries and can minimize the multi-linearity between company's specific characteristics such as size, age and profitability.

Another important performance measurement is market-based performance. Since accounting-based performance only capture historical aspect or past performance of companies, lately some researches also used market-based performance to assess company's business performance. The used of market-based measures have its own advantage since this measures less vulnerable to differential accounting procedures and it representing investors' evaluation of a firm's ability. According to Omran (2009), while accounting-based performance measures the past and current performance of the firm, market-based performance, in addition to that, captures the expected future performance of the firm. However, in the context of emerging economies like Malaysia where capital markets are not well developed and tend to be volatile, the market performance actually does not reflect the performance and real value of the firms especially during and after the Asian Financial Crisis 1997/98 that severely hurts Malaysia's capital market particularly the value of firms listed on Bursa Malaysia Securities. In overall, until 2006 Bursa Malaysia Securities still has some 200 companies trading at more than 50 percent discount to their book values (James, 2006). Based on this argument, this research will depend only on accounting-based performance and the next two sections will discuss on the proposed approaches.

In the last ten years (1999-2009), at least 33 empirical researches have been conducted on the issues of ownership structure and corporate governance structure in developed countries and emerging economies (See Appendix A). The detail analysis on the researches revealed as follows:

From the 33 studies, 21 percent of the researches used accounting based measurement, 24 percent used market based measurement and the rest 55 percent researches used both the accounting and market-based ratio as the performance measures;

The most popular variables for performance measurement are return on assets (ROA), return on equity (ROE) and Tobin's Q. For accounting performance ratio, 36.4 percent researches used return on assets (ROA) and 12.1 percent used return on equity (ROE). Meanwhile, 34.8 percent researches used Tobin's Q as market performance indicator in their studies. In overall, many researches combined their performance measures and they used multiple variables in their study particularly from 2004 onwards. Figure 1.1 shows the percentage of studies done based on accounting, market-based or both type of measurement for the period of 1999-2009;

From 23 studies that used Tobin's Q as market-based performance measurement, 14 or 60.9 percent had been conducted in developed market such as the USA, Australia, Singapore, China, South Korea or using big firms in Investor Responsibility Research Centre (IRRC) database as their sample.

Accounting-based measure of firm profits

Accounting ratios are the most common measurement used in analyzing financial performance of companies and they are known as performance ratios. The two most commonly used ratios as the proxy for profitability in empirical studies that related to corporate governance and firm's performance are return on assets (ROA) and return on equity (ROE). They have been used widely in measuring firm performance, for example, Vafeas (1999), Abdullah (2004), Bhagat & Black (2002), Rahman & Haniffa (2006), Ang & Ding (2006), Bhagat & Bolton (2008) and Chu (2009) had make use of these ratio either alone or as combination in their empirical studies, mostly on the issues of corporate governance structure and ownership structure and their link to firm financial performance.

Return on assets

The ROA percentage gauges how efficiently a company can squeeze profit from its assets. A higher ROA indicates effective use of companies' assets in serving shareholders' economic interests. In this research, the definition and formula of ROA by Chen et. al (2009) will be used as follows:

operating earnings

ROA = -------------------------------------------------

average book value of total assets

This research will use operating earnings rather than net income since the net income is prone to management manipulation (Chen & Yuan, 2004). This approach also being used by others researches such as Vafeas (1999), Ponnu (2008) and Bhagat & Bolton (2008) in their studies.

Return on equity

ROE percentage measures a firm's efficiency at generating profits from every dollar of net assets (total assets minus total liabilities) or the shareholder equity. It helps shareholders to determine how well management creates value for them and as a yardstick to measures management efficiency and effectiveness. Similar to the formula for ROA above, operating earnings will be used to calculate ROE and the formula is:

operating earnings

ROE = -------------------------------------------------

average shareholders' equity

2.0 Proposed Control Variables

Five control variables that may affect firm performance and commonly used in emerging market like Malaysia have been identified namely:

Firm size (proxy by total assets)

Leverage (the ratio of total liabilities to total assets)

Liquidity (the ratio of total current assets to total current liability)

Years of establishment

Sector of industry

3.0 Proposed Model

The relationship between performance and (i) ownership structure and; (ii) corporate governance structure will be tested using the following base model:

3.1. Sample of Government-linked companies (GLCs)

PERFORM = α + β1FGCA + β1FGTISB + β2SGCA + β3GOLDEN + β4DEGREE + εi


PERFORM = firm performance proxy by ROA and ROE

FGCA = firms whose largest shareholder is Khazanah Nasional Berhad

FGTISB = firms whose largest shareholder either Federal Government Trust

Institution or Statutory Body

GOLDEN = firms whose Federal Government owned one golden share

DEGREE = captures the percentage of Khazanah Nasional Berhad and Federal Government

Trust Institutions or Statutory Body ownership in a GLC

3.2. Sample of Non-Government-linked companies



PERFORM = firm performance proxy by ROA and ROE

FAMILY = firms whose largest shareholder is individual/family

FOREIGN = firms whose largest shareholder is foreign institution

DEGREE = captures the percentage of individual/family and foreign ownership

in a non-GLC

3.3. Sample of all companies (GLCs, family & foreign ownership)




PERFORM = firm performance proxy by ROA and ROE

BODSIZE = board size

AUDITSIZE = number of audit committee member

BODIND = proportion of independent directors in BOD

AUDITIND = proportion of independent directors in audit committee

BODMEET = board of directors meeting frequency

AUDITMEET = audit committee meeting frequency