Non-financial performance measures disclosure, quality strategy, and organizational financial performance: a mediating model

We investigate the relationship between internal performance evaluation and the ability of external market participants to assess the effectiveness of management's quality strategy for a sample of 156 Australian manufacturing firms that link executive compensation to non-financial performance measures (NFPM). We find that for firms where management compensation is tied to non-financial performance measures, organisational financial performance, as measured by return on investment, has no significant direct association with the extent of disclosure of non-financial performance measures in the financial statements by Australian manufacturing firms. However, we find that the origination of a firm's non-financial performance measures indirectly and significantly affects the financial performance of an organisation through the implementation of quality based strategy. Further, we find that manufacturing firms that place greater emphasis on quality strategy disclose more information regarding non-financial performance measures in their annual reports, and that only for firms following a quality strategy, the disclosure of non-financial performance measures positively impacts operating financial performance.