The Effects of Firm Size and Measurement Characteristics on Performance Score

This study examines the effects of firm size and measurement characteristics on performance score. Most of previous studies support that large firm have better performance score because large firms have additional resources and capabilities,more knowledge or experiences, and specific process established. This paper adds on prior studies suggesting that rater bias such as raters' subjective judgements, unfair evaluation, and favoritism can be an another reason for the firm size effect on performance score. Because of insufficient information gathering and limited time,raters may not see firm performance from a completely objective point of view but evaluate it depending on performance report that ratees prepare. Arguably, larger firm is more capable of preparing reports and communicating with raters. In order to disentangle rater bias from true firm performance, we first examine the existence of firm size effect on performance score. Then, we further examine whether this firm size effect is higher in subjective measures than in objective measures because subjective measure is more prone to individual judgement. We find that firm size is significantly and positively associated with its performance score and size effect is significantly higher in subjective measures compared to that in objective measures. Our findings suggest that rater bias produces firm size effect on performance score. That is, performance evaluation results can be distorted to be of great advantage to large firm who exert more effort on activities to get better rating other than to improve actual performance. In order to provide fair evaluation to ratees, designers of performance metrics should understand raters' and ratees' incentive in performance evaluation system.