Lacking Correspondence Between Subjective and Objective Performance Data Among Small Business Managers: An Abstract

Abstract

This study examines (1) how accurate are small business managers’ subjective responses concerning the performance of their company in comparison to objective performance data and (2) whether there are factors that explain why some respondents offer more accurate responses than others. The authors collect subjective data from 487 Finnish companies in relation to how their profitability has changed over the past 12 months. Regarding objective performance data, the authors use a secondary database of comparable financial information for public and private companies across Europe. The authors collect data on how the companies’ profitability has developed in the accounting period (12 months) preceding the time the survey was administered. However, due to missing secondary data, the effective sample size was reduced to 141 companies.

The study classifies the companies into two groups (correct direction vs. incorrect direction) by comparing the manager-rated performance data against objective data about net profit margin change for each company. Surprisingly, only 46.1% of the respondents correctly indicated if the profitability of their company had improved or decreased. Next, the authors used an alternative grouping, focusing on companies whose profitability had either notably decreased or improved (i.e., more than ±5.0 percentage points). The results show even worse accuracy, as only 39.5% of the respondents correctly indicated how their company’s profitability had changed. Finally, the authors used binary logistic regression to study how company size, age, and growth orientation affect the odds of the respondent correctly indicating whether company performance has improved or decreased. The results show that none of the factors is a statistically significant predictor.

The results suggest that small business managers may be unable to express how well (or how poorly) their company has performed. Such a conclusion gains support from the views that small businesses operate in an informal manner (e.g., Gilmore et al., 2001; Stokes 2000) and that they base their responses on intuition instead of hard calculations. On the other hand, the results leave open for debate the possibility that managers are unwilling to give accurate responses. However, more research is required before conclusions of this nature can be made.