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Abstract
This study examined the relationship between 130 firm's business investment strategy and their firm performance, as measured by return on investment (ROI) and earnings per share (EPS). ROI was used as the accounting performance measure and EPS was used as the market-based performance measure. Results indicate that the accounting performance measure (ROI) may be more appropriate for firms pursuing share-increasing and turnaround business investment strategies. Whereas both accounting (ROI) and market-based (EPS) measures may be more appropriate for firms pursuing less risky profit-oriented business investment strategies.
Introduction
The conceptual framework of an organization as an open system is essential to understanding strategy decisions which are responsive to both sources of opportunity (eg. market expansion, new products) and threats (eg. competition) simultaneously (Hrebiniak & Joyce, 1984). Current research involving business strategy and performance is contradictory and fragmented. Further, there is frequent disagreement in the literature as to what constitutes an appropriate measure of organizational performance.
The purpose of this study is to examine the relationship between business investment strategies and firm performance measures. Return on investment (ROI) was used as the accounting measure while earnings per share (EPS) was used as the market- based measure to assess firm performance. The study examines whether the objectives of a performance measure and the type of business investment strategy were determinants for selecting an appropriate firn performance measure. In examining these issues, the study explored whether the use of accounting (ROI), market-based (EPS), or multiple (ROI and EPS) measures varied as the degree of risk associated with a firm's business investment strategy.
The use of accounting and market-based measures may provide an appropriate and more comprehensive measure of firms pursuing relatively less risky investment strategies such as profit or market-concentration asset reduction. Under these conditions, external measures are more munificent for assessment of strategic and tactical decisions, thus suggesting credence for the use of both past financial measures and the investors' market expectations. Since both multiple performance measures may be necessary to the evaluation required by such investment strategies, accounting and market-based performance measures would appear to be essential in evaluating past financial performance and in developing future strategic decisions which influence future investor decisions.
Researchers (Smith, 1976; Michel & Shaked, 1984; Rockmore, 1991) have argued...