Executive Summary
Many analyses of firm performance are based upon self-reported measures. However, not only are these likely to be more subject to general reporting error than alternative official sources, but also measures of relative performance may be subject to the biases observed in the psychology literature. In this paper we consider both absolute and relative performance, reported in the Business Operations Survey (BOS), with alternative measures taken from official sources, brought together under the Improved Business Understanding via Longitudinal Database Development (IBULDD) project in the prototype Longitudinal Business Database (LBD).
Our results suggest that there is much commonality in the picture we see using either administrative (tax) or quantitative survey data, giving us some comfort that the tax data, while not collected for statistical purposes, serves as well as a tool for measuring firm performance. However, there are many differences also, in particular when we consider reported profits. Specific results include:
Sales
Figures recorded for the sales of goods and services are similar in the BOS, financial accounts (IR10) and GST-based Business Activity Indicator (BAI) data, when we have all three figures. However, fewer firms submit IR10 returns; there is IR10 data for only 60% of the cases where there is BAI and BOS data. Firms that do not return IR10 forms appear to be larger than average.
Profits
It is clear from our analysis that total taxable profits from firms' IR10 returns and operating profits from the BOS are measuring different things. Operating profits calculated from the BOS are four to five times total taxable profits in the IR10. Despite the difference in the levels of profits, they are significantly correlated.
Decomposing the difference shows that firms report slightly higher amounts for expenses in the BOS than in the IR10 (for the categories in the BOS where we can make a direct comparison). Despite the similarities between the specific categories of expenses, overall expenses are much higher in the IR10 returns than in the BOS.
Employment
The employment figures in the BOS are highly correlated with those obtained from PAYE data but the former are 10-25% higher than the latter. This may in part be due to the reporting periods for each being different – the PAYE data are based on the average of monthly figures, whereas the BOS is a single point in time.
Productivity
Our results show that the productivity measures are significantly correlated with each other, but the value of productivity obtained from the BOS is higher than that obtained from the BAI. Whilst there might be contamination of sales and purchases data in the BAI by capital sales and expenditure, it is not certain this will bias the sales data in either direction.
Subjective measures
Subjective measures of firm performance are often the only information analysts have at their disposal and so their correlation with more objective – but harder to come by – measures of firm performance is of considerable interest. Respondents tend on average to consider themselves above average. This is consistent with the previous work on firm and individual reporting behaviour. Firms that report their productivity is lower than their competitors have the lowest labour productivity and those that believe they are more productive indeed appear to be more productive than those who believe they are on a par with their competitors. We find similar results when we consider profitability.
Because our dataset is so rich, we can consider the productivity of the firm relative to all firms in a similar industrial classification. We examine two alternatives – defining the group of firms in competition with the firm as all those in the 3-digit or 4-digit ANZSIC industry in which the firm is situated. The results of these are weaker, but there is still some correlation with firms' perceptions
Whilst we have confirmed previous work that suggests that there is considerable heterogeneity in how firms respond to questions where they are asked to compare themselves to their competitors, the subjective measures do contain some information regarding the equivalent objective measures. Both sets of measures do tend to point in the same direction. The fact that they are different may be both a good and bad thing. They are imperfect (but not necessarily biased) measures of firm performance, but they may tell us something about how the firm perceives its business environment that "objective" measures do not.
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