Exploring the Dimensions of Organizational Performance: A Construct Validity Study

Abstract

Organizational performance is a fundamental construct in strategic management. Recently, researchers proposed a framework for organizational performance that includes three dimensions: accounting returns, growth, and stock market performance. We test the construct validity of indicators of these dimensions by examining reliability, convergent validity, discriminant validity, and nomological validity. We conduct a confirmatory factor analysis with 19 analytically derived indicators on a sample of 37,262 firm-years for 4,868 listed U.S. organizations from 1990 to 2010. Our results provide evidence of four, rather than three, organizational performance dimensions. Stock market performance and growth are confirmed as separate dimensions, whereas accounting returns must be decomposed into profitability and liquidity dimensions. Robustness analyses indicate stability of our inferences for three dissimilar industries and for a period of 21 years but reveal that organizational performance dimensions underlie dynamics during years in which environmental instability is high. Our study provides an initial contribution to the clarification of the important organizational performance construct by defining four dimensions and validating indicators for each dimension. Thus, we provide essential groundwork for the measurement of organizational performance in future empirical studies.