How to Define Financial Performance

For several decades, rent has served as the theoretical dependent variable of strategy. Empirically however, performance has been operationalized using many different measures that do not capture the concept of economic rents. More fundamentally, common rent definitions are based on equilibrium assumptions that are untenable in most contemporary market conditions. To address this situation, this study proposes to replace rent with the concept of “fully-loaded profit”, a measure of ex post net present value. It is this measure that managers are supposed to optimize. The study offers a formal analysis fully-loaded profit’s properties. These properties are used to derive three new performance measures to be used in empirical studies: adjusted economic profit (AEP), market-based economic profit (MEP), and adjusted market-based economic profit (AMEP).