iso 9000 and performamce

8/8/2019 ISO 9000 and Performamce

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The association between ISO 9000 certification

and financial performanceB

Divesh S. Sharma*

Department of Accounting, Faculty of Business, The Auckland University of Technology,

Private Bag 92006, Auckland 1020, New Zealand

Abstract

This study explores the association between ISO 9000 certification and financial performance

at the organizational level in a mature quality initiative market. It extends the limited literature on

quality initiatives and objective measures of financial performance. The study hypothesizes that

ISO 9000 certification is associated with improvements across three dimensions of financial performance. These dimensions are operating efficiency, growth in sales, and overall financial

performance. These dimensions of performance are measured using profit margin, growth in sales,

and earnings per share, respectively. Based on data for a sample of 70 companies listed on the

Singapore Stock Exchange over a 6-year period, the results of the study are consistent with the

hypothesized effects. In particular, the results show that the extent of improvement is driven

largely by operating efficiencies and suggests that firms can benefit from ISO 9000 certification if

they are genuinely interested in the quality philosophy by improving their internal business

processes.

D 2005 University of Illinois. All rights reserved.

Keywords: ISO; ISO 9000; Quality; Performance; Internal processes

0022-7063/$30.00 D 2005 University of Illinois. All rights reserved.

doi:10.1016/j.intacc.2005.01.011

B Data availability: all data used in this study are available from public sources.

* Tel.: +64 9 917 9999.

E-mail address: [email protected].

The International Journal of Accounting

40 (2005) 151172


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1. Introduction

Quality management initiatives such as total quality management (TQM) and just-in-

time systems (JIT) are receiving growing attention in management accounting textbooks.

However, the effect of such initiatives on financial performance has received little

attention in academic research. This is probably because much of the research on quality

and self-reported non-financial firm performance measures are located in the quality

management paradigm. Noting the lack of studies on quality initiatives generally, Maher

(1995) urged accounting researchers to undertake a time-series exploration of the effects of

quality initiatives on organizational performance. However, such research remains scarce

in the accounting discipline. Ittner and Larcker (1995) were among the first management

accounting researchers to study the effect of quality management practices on organiza-

tional performance. Balakrishnan, Linsmeir, and Venkatachalam (1996) and Kinney andWempe (2002) investigated the financial impact of JIT systems. Most recently, Nagar and

Rajan (2001) studied the relationship between financial and non-financial indicators of

quality and future sales.

However, it is not easy to establish an empirical relationship between the adoption of

quality initiatives such as TQM and JIT and firm performance that are measured by

accounting variables. The difficulty of establishing an empirical relationship between

TQM and JIT initiatives on firm performance stems from determining the objectivity of

the extent of adoption, the validity of the adoption claims by the firm, and identifying an

adoption date. Easton and Jarrell (1998, p. 256) describe the problem in the context of

TQM as follows:

First, whether or not a firm has seriously pursued TQM cannot be determined by

relying on the firms public announcements. Many firms claim to be implementing

TQM when, in fact, they have made essentially no changes (other than in their

public rhetoric). . . . Second, firms seldom publicly announce the beginning of the

deployment of their TQM systems. In fact, there is often no completely

unambiguous start date.

The purpose of this research is to investigate the association between International

Organization for Standardization 9000 (ISO 9000) certification and financial performance

at the organizational level. A study of the effect of ISO 9000 certification on financialperformance alleviates the limitations of prior studies because the certification process

requires compliance with the elements of the ISO 9000 standards. The certification process

is conducted by an approved independent ISO 9000 registrar. If a firm meets the ISO 9000

standards following an audit by a registrar, the firm is issued an ISO 9000 certificate that

includes the scope of certification and the effective date. While certificates are typically

issued for 3-year periods, compliance review is performed every 6 months.

Although ISO 9000 certification has been globally pursued and implemented, very few

studies have explored its impact on objective measures of financial performance. The

literature abounds with studies examining the effect of ISO 9000 certification on self-rated

performance measures such as product quality, defects, employee satisfaction, employee

turnover, customer satisfaction, supplier quality, and productivity, to name a few. While

such studies add to our knowledge about the effects of ISO 9000 certification and quality

D.S. Sharma / The International Journal of Accounting 40 (2005) 151172152


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systems on performance, the use of self-rated performance measures is not independent,

suffers from self-reporting bias, and, thus, presents limitations. The implications of self-

rated measures are well recognized in the management accounting literature.

Moreover, the phenomenal growth in the number of companies attaining ISO 9000

certification worldwide suggests certification will yield benefits to the firm.1 The benefits

appear to have been realized because, as noted previously, the literature is replete with self-

rated benefits of ISO 9000 certification. However, whether ISO 9000 certification is

associated with more objective measures of performance remains an empirical issue. If

ISO 9000 certification is not positively associated with financial performance, it may

possibly lose credibility and be regarded as another management fad. It is conceivable that

the self-rated benefits are a self-fulfilling prophecy. Juran (1999), one of the pioneers of

quality concepts, is quite pessimistic about ISO 9000 and has called for research de-

monstrating the financial benefits of the costly ISO 9000 certification process. This studyfills the current void in the literature and addresses an important policy and strategic issue.

Specifically, I investigate the extent to which ISO 9000 certification improves financial

performance at the organizational level and make the following contributions. First, I use

financial performance measures derived from audited financial statements. Prior literature

investigating ISO 9000 effects has focused on self-rated measures of performance that

suffer from inherent bias. Second, prior studies have largely investigated differences in

performance between firms with ISO certification and those without in the post-ISO

period. I extend this literature by providing evidence on ISO 9000 certification and the

extent of improvement in financial performance. I investigate the financial performance of

firms based on data 3 years prior to and 3 years after ISO 9000 certification. I also employa benchmark of matched-control firms that never pursued ISO 9000 certification either in

the period of study or 3 years thereafter. This is the most important contribution of the

study as it provides an objective assessment of the impact of ISO 9000 certification on

performance.

Third, I study a range of industries. I do not restrict my sample to manufacturing firms for

the simple reason that ISO 9000 certification is a non-industry specific standard. The ISO

Survey of ISO 9000 lists 39 industries from which companies have attained certification, yet

studies confine their analysis to the manufacturing industry.2 However, I test the sensitivity

of my results to industry membership and find that the results relating to the effects of ISO

9000 certification on performance is not affected by industry membership.Fourth, I study the certification effect on performance in an emerging market

(Singapore) where the quest for gaining global competitive advantage both within the

region and against firms from developed nations such as Japan, the United Kingdom and

the United States is intense. An emerging market is also studied because there is very little

evidence on quality initiatives outside the major markets such as Japan, the United

Kingdom and the United States (Low, Tan, & Ang, 1999). As multinational corporations

1 Since 1983, the number of ISO 9000 certificates issued has grown from just under 28,000 to over 400,000,

spanning 158 countries in December 2000. As of December 2000, Europe comprised 53.87% of totalcertifications with Asia in second place with 20.05%.2 For details refer to bThe ISO Survey of ISO 9000 and ISO 14000 CertificatesTenth CycleQ published by the

International Organization for Standardization.

D.S. Sharma / The International Journal of Accounting 40 (2005) 151172 153


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shift their manufacturing processes to developing nations, such as those in Asia, studying

emerging markets becomes even more critical. In concert, suppliers in emerging markets

are facing increasing pressure from their global customers in the major markets to provide

the highest quality goods and services (Chan, 2000; Quazi, Chang, & Chan, 2002). ISO

9000 certification is a global recognition of achieving high and consistent quality

standards.

Finally, Singapore, as a mature ISO certified nation, provides a suitable context for

investigating whether ISO certification is associated with higher financial performance.3 In

non-mature ISO contexts, the bfirst moverQ to attain certification might experience gains

due to visibility rather than to improvements in its internal business processes. In a mature

ISO context, where most firms are ISO certified and competition is intense, superior

performance would demand genuine improvements to internal processes visible to

customers through higher quality products and value-for-money prices.The analysis, based on 384 firm-years of data derived from 70 companies listed on the

Singapore Stock Exchange over a 6-year period revealed that the financial performance of

firms achieving certification was significantly greater than non-certified firms. More

importantly, the results indicated that ISO 9000 certification was associated with

significant improvements in financial performance; the control-firm adjusted performance

in the post-ISO 9000 certification period was significantly greater than that in the pre-ISO

9000 certification period. The results are robust to sensitivity and selection-bias tests.

These results imply that ISO 9000 certification possesses economic significance and firms

can enhance performance through certification.

However, the analysis shows that the increase in performance is attributable largely toimprovements in operating efficiency and, to a lesser extent, growth in revenue. Gains in

performance arise, therefore, if firms are genuine in their ISO 9000 implementation

process. The results and more critically the design of the study assist in explaining

inconsistencies in the literature. As with studies of this nature, the results and inferences

drawn ought to be considered in context and with regard to the limitations of the study as

discussed in the concluding section of the paper. The next section provides the background

on ISO 9000 certification and discusses the relevant literature. The research hypotheses are

articulated next followed by the research method. The final two sections present the results

and conclude the study.

2. Background and literature review

2.1. ISO 9000 certification

The strategic management agenda of firms increasingly emphasize quality management

systems. Since the promotion of quality concepts by Crosby, Deming, Ishikawa, and Juran,

3 The rate of ISO certification in Singapore has stabilized at approximately 4,000 companies with most

registrants being small and medium enterprises that are not publicly listed. The number of listed companies in

Singapore was approximately 500 as at November 2001 and many of them are now certified to ISO 9000.



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firms around the globe have gradually embraced quality management practices. One of the

milestones in quality management was the establishment of international standards for

quality. In 1987, the International Organization for Standardization (ISO) issued standards

to establish and foster voluntary adoption of global industrial and manufacturing

standards. ISO 9000 is ba series of international standards dealing with quality systems

that can be used for external quality assurances purposesQ (ISO, 1987). Unlike quality

standards relating to products and services, the ISO 9000 standards apply to the quality

management system. The purpose of the ISO 9000 standards is to ensure that a certified

company maintains a quality management system that will enable it to meet its published

quality standards relating to the processes and activities for delivering goods and services.

The Standards provide guidelines for the development, implementation, and management

of a quality management system. Organizations must document practices that affect the

quality of their products and deliver the procedures consistently to gain and maintain ISO9000 certification.

In short, ISO 9000 could be viewed as a system for managing internal business

processes from the beginning to the end of a value chain. Certification can only be

confirmed after an independent ISO audit. Regular independent audits are performed to

maintain certification. An unsatisfactory audit will lead to de-registration with subsequent

registration contingent upon meeting the requirements of certification. Therefore,

obtaining and maintaining ISO 9000 certification is a continuous and costly process.

Despite the apparent expense and bother, ISO certification has increased exponentially

in Singapore. Since 1989 at least 3900 organizations have attained certification for ISO

9000. As part of its economic development strategy, the Singapore government continuesto encourage local industries to achieve certification by providing ISO implementation

subsidies (Quazi et al., 2002). In Asia, Singapore is second only to South Korea in quality

initiatives. According to Chan (2000), Singapore has almost reached the highest echelon of

quality management practices by implementing world-class benchmarking systems in the

quest for attaining Global Quality Management status. While these initiatives are

encouraging, the research evidence to date has yet to show that such practices have led

to significant improvements in financial performance not only in Singapore but elsewhere.

The next section reviews this evidence.

2.2. Literature review

The following review of the prior literature is categorized into studies investigating the

effects of ISO 9000 certification on non-financial performance measures and those

investigating the impact on financial performance.

2.2.1. Non-financial performance studies

There is an extensive literature on the effects of ISO 9000 certification on non-financial

performance measures. The review presented here is not exhaustive but representative for

illustrative purposes. Evidence in the literature is mixed. Contextual differences and

managements motivation for seeking certification explain the inconsistent results observed.

Rao, Ragu-Nathan, and Solis (1997) surveyed companies in China, India, Mexico and

the United States to determine the effects of ISO 9000 certification on quality management



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practices and self-rated measures of non-financial performance. Most (77%) of their

respondents were manufacturers. They concluded that ISO 9000 certification had a

significant impact on quality management practices such as leadership, strategic quality

planning, good supplier relationships and customer satisfaction. They also reported that

ISO certification was significantly related to rework, throughput time, productivity, and

market share.

Elmuti and Kathawalas (1997) study of two manufacturing plants in a large U.S.

organization showed that the plant with ISO 9000 certification had better and improved

quality of work life compared to the non-certified plant. They also found that ISO 9000

certification increased employee productivity, morale, and goal congruence while it

decreased absenteeism, rework, and defects. Export sales of the plant were also enhanced.

Chittenden, Poutziouris, and Muhktar (1998) found that U.K. firms attaining ISO 9000

certification reported benefits similar to those reported by Elmuti and Kathawala (1997).Consistent effects have been observed in Northern Ireland (McAdam & McKeown, 1999),

Norway (Sun, 1999) and North America (Simmons & White, 1999).

However, results to the contrary have been reported by Beattie and Sohal (1999), Hua,

Chin, Sun, and Xu (2000), Quazi et al. (2002), Shams-ur (2001), Yamada (2001). Beattie

and Sohals (1999) survey of 50 Australian companies showed that 25% of the companies

could not identify any strategic benefits and a mere 4% reported improving their

profitability following certification. Similarly, Shams-ur (2001) noted insignificant

differences in self-rated organizational performance between small- and medium-sized

enterprises (SMEs) with and without ISO 9000 certification in Australia. Hua et al.s

(2000) survey of 100 companies in Shanghai found no significant differences in quality-related performance measures between companies with ISO 9000 certification and those

without. Yamadas (2001) survey of certified Japanese companies could not identify the

effects of ISO 9000 certification on estimated expenses and profits of large companies

listed on the Tokyo Stock Exchange. More recently, Quazi et al.s (2002) replication of

Rao et al. (1997) revealed that ISO 9000 certification did not affect quality management

practices and quality related measures of companies in Singapore. The lack of expected

relationships was attributed to the nature of the sample as 62% of the respondents were

SMEs. In contrast, the respondents in Rao et al. (1997) were mainly large organizations. A

further explanation for the difference is that SMEs are usually bpushedQ into certification

by their customers and consequently, the real drive towards quality improvement is lacking(Wiele & Brown, 199798).

Low et al. (1999) explain that the motive for attaining certification explains the lack of

observed positive association between ISO 9000 and firm performance. They investigated

whether ISO 9000 certification increased Singaporean contractors CONQUAS score. The

CONQUAS score is a system for assessing a contractors quality of work. The assessments

were made on site by assessors from the Construction Industry Development Board. They

found that most companies experienced either a fall or an immaterial increase in their

CONQUAS scores. Since the Singapore government gave rebates to ISO 9000 certified

contractors for public tenders, the primary motive for certification was to secure

government projects and rebates in the short term rather than committing to improve

quality in the real sense. The decline in the CONQUAS scores following ISO 9000

certification is consistent with this view.



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2.3. Financial performance studies

To date four studies have investigated the effect of ISO 9000 certification on non-self-

rated financial performance measures derived from financial statements. Simmons and

White (1999) studied 126 U.S. companies in the electronics industry and investigated

whether three financial performance measures (ROA for profitability, sales/equity for

operational performance, and foreign sales) were significantly different between the 63

ISO certified and the 63 non-ISO certified companies. The non-ISO companies were

matched for industry and were not ISO certified in 1995. The performance measures were

derived from the 1995 financial information available from COMPUSTAT. They found

that ISO certified companies were more profitable than non-ISO certified companies but

not with respect to operational performance and level of foreign sales. Simmons and White

(1999) reported that most of the financial gains were attached to larger firms. However,they did not control for the potential presence of non-ISO firms seeking certification; that

is, firms in the process of attaining certification. The study of just one year data also does

not permit assessing the longer term effects of ISO 9000 certification nor does it allow

them to isolate the effects of performance prior to ISO 9000 certification on post-ISO

certification performance.

Haversjo (2000) argued that quality systems such as ISO 9000 certification would

improve internal and external quality and consequently improve profitability. He

investigated differences in the rate of return of ISO 9000 certified and non-ISO

certified Danish companies.4 His results based on 664 companies showed significantly

higher rate of return for ISO 9000 certified companies than their size-matchedcounterparts. The difference in performance between ISO companies and non-ISO

companies was 20% in the year prior to certification and approximately 35% 2 years after

certification. However, similar to Simmons and White (1999), his tests did not isolate the

effects of pre-ISO performance on post-ISO performance; that is, to what extent was the

performance in the post-ISO period due to a continuation of performance prior to attaining

certification? An examination of his tabulated trend analysis shows that the difference in

the 5 year average rate of return between the ISO and control firms was 29.8% prior to ISO

9000 certification and 12% following certification. It therefore appears from Haversjos

(2000) data that ISO 9000 certification is not associated with significant financial gains in

the longer term.More recently, Heras, Casadesus, and Dick (2002) provided evidence of certified

Spanish firms outperforming non-certified firms. Using return on assets (ROA), their

univariate tests show that the ISO 9000 certified firms achieved 24% to 45% higher ROA

than non-certified firms over a 4-year period. However, like the preceding studies, Heras et

al. (2002) did not control for factors (e.g., size, industry, prior performance) likely to

influence performance and do not conduct selection-bias tests. They also do not test

performance before and after ISO 9000 certification. In a subsequent study, Heras, Dick,

and Casadesus (2002) control pre-certification performance in their univariate test and

report that ISO certification does not increase profitability. With the exception of this

4 Haversjo (2000) does not define rate of return.



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control, their study suffers from the preceding limitations that raise questions about the

validity of their findings.

The four studies reviewed above appear to show some short-term differences in

profitability following ISO 9000 certification. However, the studies are unable to

demonstrate that the effects of ISO 9000 certification on financial performance were not

a result of continuation of the pre-ISO 9000 certification performance. That is, they did not

control for pre-ISO 9000 performance when determining post-ISO 9000 performance.

None of the studies performed a selection bias test to determine whether the firms

underlying characteristics prompted them to seek ISO 9000 certification. If there are

differences in profitability, then it is possible that the effects reported in prior studies have

been overstated. The survey studies on self-reported financial and non-financial measures

have similarly not been able to ascertain that post-ISO 9000 performance had improved

following certification. In this study, I adopt a research design that allows me to test theextent of improvement in financial performance following ISO 9000 certification and

control for extraneous effects. I also perform sensitivity and selection-bias tests that I

discuss following the main results.

3. Hypotheses development

The literature identifies two fundamental theories that explain possible sources of gains

following ISO 9000 certification. The two theories can be described as Internal

Improvement Theory and External Improvement Theory. Both theories rationalize thatperformance in the post-ISO 9000 certification period should exceed performance in the

pre-ISO 9000 certification period.

3.1. Internal improvement theory

The internal improvement theory is based on the rationale that ISO 9000 certification

brings benefits through greater quality awareness among employees (e.g., Brooks, 1995;

Brown & Van der Wiele, 1995; BSI, 2000; Dale, 1994; Peach, 1997), and increased

productivity and efficiency (e.g., Arnold, 1994; Brooks, 1995; BSI, 2000; Buttle, 1997;

RAB, 2000; Reed, Lemak, & Montgomery, 1996). In other words, ISO 9000 certificationseems helpful for companies seeking to improve the quality of their internal business

processes. ISO 9000 certification is frequently regarded as the stepping stone to achieving

total quality in the entire organization (Quazi et al., 2002). The following sub-sections

briefly articulate drivers of quality-related improvements in a firms internal business

processes.

3.1.1. Quality awareness

Quality-conscious employees understand the importance of producing high-quality

output and are capable of executing the operations with that objective in mind. ISO 9000

facilitates this objective by providing bguidelines for developing a quality system and the

process of acquiring certification impose a certain level of discipline on an organizationQ

(Carr, Mak, & Needham, 1997, p. 387). Consequently, a company accredited with ISO



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9000 is dedicated to maintaining a high-quality environment. Hence, workers would

experience fewer problems on the job and consequently increase their motivation and job

satisfaction that ultimately manifests in better financial performance.

3.1.2. Productivity and efficiency

Productivity and efficiency relate to the rate at which goods and services above

minimum satisfactory levels can be delivered to customers. Throughput rate and similar

measures of productivity and efficiency increase when employees are aware of quality

objectives, and when they are motivated and share common strategic visions. Marquardt

(1992) provides evidence consistent with this view. Given the improvements in

productivity and efficiency following certification, it is inferred that ISO 9000 certification

reaps cost savings by eliminating non-value-added activities, reducing scrap, rework, and

warranty claims. In summary, the internal improvement theory suggests ISO 9000certification would improve internal business processes such that production becomes lean

and costs decline.

3.2. External improvement theory

Although internal quality improvements are imperative, companies cannot ignore the

needs and responses from the market (Lisiecka, 1999). After all, the purpose of a company

is to maintain and increase profits and its survival is contingent on its ability to satisfy

customers and sustain competitive advantage (Carr et al., 1997). In other words, a

companys improvement must not be observable only from inside the organization; itsexternal business partners should also be able to recognize the change and its quality.

While the pursuit for ISO 9000 accreditation may reflect an organizations strategic

intent to be quality-focused, research indicates that the driving force could essentially be

customers expectations and contractual requirements (e.g., Brown & Van der Wiele,

1995; Rayner & Porter, 1991). Companies bstampedQ with the quality logo increase

customer confidence and help speed up the supplier-selection process (Dale, 1994;

Yamada, 2001). Consequently, ISO 9000 certified firms are likely to increase their

customer base and market share and, therefore, sales. These coupled with internal-process

improvements could lead to improvements in overall financial performance.

The preceding discussion and the literature review suggest that gains in financial performance are available through ISO 9000 certification. In the current competitive

environment many firms are seeking ISO 9000 certification to improve their internal

business processes for competitive advantage. Conceptually, the balanced-scorecard

framework would suggest that improvements to internal processes could lead to enhanced

financial performance. Given that certification to ISO 9000 is evidence of improvements

to the quality management system driving a firms internal processes, it follows that ISO

9000 certification is associated with increased financial performance.

The balanced-scorecard framework also suggests that customer satisfaction is

associated with sales revenue. This is the drive that comes from the firms external

environment. Finally, the balanced-scorecard framework relates improvements to the

internal business processes to greater customer satisfaction and consequently better

financial performance. The theories underpinning ISO 9000 certification and the balanced-



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scorecard framework suggest the motivation for ISO 9000 certification could be either

internal or external or both. Therefore, I specify three hypotheses.

Hypothesis 1 relates ISO 9000 certification to internal efficiencies and Hypothesis 2

refers to external effects. Hypothesis 3 reflects the belief that the benefits of ISO 9000

certification exceed its cost such that overall financial performance increases as a result. I

use return on sales (earnings before interest, tax, and extraordinary items divided by net

sales) as the financial measure for efficiency. I use growth in sales to capture the effect of

the external improvement theory. Finally, I use earnings per share (operating income after

tax divided by number of ordinary shares issued) to capture the overall improvement in

financial performance related to ISO 9000 certification. Hence, I formulate the following

three hypotheses:

H1. The financial efficiency (profit margin) of firms improves with ISO 9000 certification

and is greater than firms without ISO 9000 certification.

H2. The growth (sales growth) of firms improves with ISO 9000 certification and is

greater than firms without ISO 9000 certification.

H3. The overall financial performance (earnings per share) of firms improves with ISO

9000 certification and is greater than firms without ISO 9000 certification.

4. Research design

4.1. The sample

All Singapore incorporated companies listed on the main and secondary boards (SGX

and SESDAQ) were identified for ISO 9000 certification from information held by the

Productivity and Standards Board. Companies that were ISO 9000 certified after 1998

were eliminated because the study requires at least 3 years of post-certification data. I

required 3 years of post-certification data to capture the benefits following a sufficient

bgestationQ period. Prior studies have not allowed a sufficient time for the effects of ISO

9000 certification to be realized. The primary data set included financial data through

fiscal years ending December 31, 2000. Thus, companies listed after 1994 could not beincluded. Furthermore, companies incorporated overseas were eliminated from the sample

due to an inability to establish their ISO 9000 certification status. Industries without any

ISO 9000 certified companies were also omitted. Because I matched the ISO 9000

certified companies with a non-certified company (discussed below), companies that were

in the process of attaining certification were excluded from the non-ISO matched sample. I

determined this by referring to company websites, print media, and phone calls. Finally,

ISO 9000 certified companies in industries without any non-ISO 9000 certified companies

were eliminated. Forty companies did not have the required information and were thus

eliminated. These procedures yielded a sample size of 52. To increase the sample size, 18

companies with at least 2 years pre- and 2 years post-certification data were added. Thus,

the final sample size was 70 comprising 35 ISO 9000 certified and 35 matched non-ISO

certified companies. Table 1 summarizes the sample-selection process.



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The distribution of ISO 9000 certification over the 8-year period was quite even, with

the exception of 1994 which recorded the highest number of certifications. This is

mostly due to the Singapore government bdemandingQ certification for construction

firms eligibility to undertake large government projects. There was one certification in1991, two in 1992, three in 1993, 11 in 1994, four in 1995, five in 1996 and 1997, and

four in 1998. The sample was represented by the following industries; services 28%,

engineering and machinery 26%, construction 20%, electronic and electrical 14%,

packaging 6%, food producers 3% and household goods 3%. I conducted sensitivity

tests for industry and year effects and found the results relating to the effects of ISO

9000 certification on financial performance were robust. The relevant results are reported

in the Results section of the paper.

4.2. Research design and test variables

4.2.1. Matched control sample

As the study is concerned with the effects of ISO 9000 certification on financial

performance, I employ a sample of ISO certified firms and matched non-ISO certified firms.

The matched control firm also assists control for economy-wide and industry factors.

Consistent with Simmons and White (1999), matched firms were selected based on industry

classification and asset size. Matching on size also controls for the capability of firms to

embark on the ISO 9000 certification process. Larger firms with greater resources and access

to capital markets are capable of and committed to investing in long-run quality processes. A

paired t-test of differences in size (total assets in year 0) between ISO 9000 certified and non-

ISO 9000 certified firms was not significant (t=0.756,p N0.10). This suggests that the firms

were appropriately matched. While I did not match the firms on their performance over the 3

years prior to certification, the data in Panel A of Table 2 shows the performance of the ISO

Table 1

Sample selection process

Reason for elimination from the sample No. of firms

Total listed companies on SGX and SESDAQ as at 28 November 2001 493

Company was listed after 1994 (222)

Company was ISO 9000 certified after 1998 (6)

Company was partially ISO 9000 certified (16)

Company was incorporated overseas (56)

Industry without ISO 9000 certified companies (e.g., diversified industry,

investment, finance)

(57)

Excess unmatched non-ISO 9000 certified companies (39)

ISO 9000 certified companies without matched non-ISO 9000 certified

companies

(5)

Full set of financial data not available (3 years prior to and 3 years

following the year of ISO 9000 certification)

(40)

Remaining in the sample 52

Companies added with most complete set of financial data (minimum

2 years prior to and 2 years following the year of ISO 9000 certification)

18

Total sample size 70



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9000 certified and non-ISO 9000 certified firms do not significantly differ in the 3-year

period prior to the certification year. Recognizing that more profitable and growth firms have

incentives and the financial capacity to attain certification, I conducted self-selection bias

tests and found that the results relating to the effects of ISO 9000 on performance are robust.

Results of this test are reported in the Results section of the paper.

4.2.2. Test design

In recognition that the pre-ISO 9000 certification and post-ISO 9000 certification

performance could be due to economy-wide and industry factors, or a continuation of firm-

specific performance prior to ISO 9000 certification, I employed an adjusted performance

measure when evaluating the effects of ISO 9000 certification on performance. The

control-adjusted performance measure is computed as illustrated in Fig. 1. First, I derived

a pre-ISO adjusted value (X) by comparing the financial performance for each ISO 9000certified firm with its matched non-ISO 9000 certified firm for the 3 years prior to the

certification year. Similarly, I derived a post-ISO adjusted value ( Y) by comparing the

financial performance for each ISO 9000 certified firm with its matched non-ISO 9000

certified firm for the 3 years following the certification year.

Second, I evaluate the difference between the pre-ISO adjusted value (X) and the post-

ISO adjusted value ( Y) as shown in Fig. 1 to determine the extent of improvement due to

ISO 9000 certification. The test design attempts to control for the effect of economy-wide

and industry factors and pre-ISO 9000 certification performance on post-ISO 9000

certification performance. This design ensures, ceterus paribus, that the difference in

financial performance between the pre- and post-ISO 9000 certification periods relates toISO 9000.5

4.3. Test variables

I use financial ratios to measure company performance. The approach is to use pre- and

post-certification accounting data to test for changes in company performance. The ratios

are computed for every company up to 3 years prior and 3 years subsequent to the

certification year. Since this study is investigating whether ISO 9000 certification is

associated with economic gains, the financial ratios selected reflect whether the source of

the effect is internal or external. The three ratios used in this study focus on efficiency

5 A more complete and rigorous design would include ISO registered firms not continuing registration. The

inclusion of such firms for comparative purposes would assist in ascertaining whether ISO certification was

optimal, particularly for firms without ISO. However, the results of this study show that firms without ISO

certification are significantly outperformed by their ISO certified counterparts following certification.

Nevertheless, I discussed deregistration by ISO firms with the CEO and Vice President of the largest ISO

authority in Singapore. The discussions revealed that firms very rarely deregister or not continue registration. The

most common reasons for deregistration included relocation outside Singapore, terminating activities or winding

up. Deregistration for publicly listed companies was the most rare; in fact the CEO and Vice President could not

recall the deregistration of any company over the last few years. They explained that given their visibility, publiccompanies do not deregister because of potential economic consequences both from trading partners and internal

efficiencies. In short, the benefits of ISO 9000 certification are seen as valuable in Singapore and the lack of

deregistration data does not allow me to study firms discontinuing ISO 9000 registration.



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(profit margin/return on sales) as an internal source of gains, revenue (sales growth) as an

external source, and profitability (earnings per share) as overall financial performance

giving returns to shareholders. All three measures of performance indicate whether ISO

9000 certification is a value-increasing event that is associated with real economic gains.

The focus on efficiency, revenue and profitability is consistent with prior studies and the

theoretical relationships between ISO 9000 certification and financial performance

advanced earlier. Since the hypotheses are directional, all tests of improvements in

performance are based on a one-tailed test. Following Fig. 1, Eqs. (1), (2) and (3) test the

extent of improvement in performance where DGSALES, DEPS, and DPM reflect

differences captured by X and Y in Fig. 1:

DGSALES GSALESISOPOST GSALESNISOPOST

GSALESISOPRE GSALESNISOPRE 1

DEPS EPSISOPOST EPSNISOPOST EPSISOPRE EPSNISOPRE 2

DPM PMISOPOST PMNISOPOST PMISOPRE PMNISOPRE 3

where: ISOPOST= performance measure for ISO 9000 certified firm in the post-ISO

9000 certification period; ISOPRE=performance measure for ISO 9000 certified firm in

the pre-ISO 9000 certification period; NISOPOST = performance measure for control

firm (non-ISO 9000 certified) in the post-ISO 9000 certification period; NISOPRE=

performance measure for control firm (non-ISO 9000 certified) in the pre-ISO 9000

certification period; GSALES = growth in net sales measured over the 3-year period

either in the pre-ISO or post-ISO certification period; EPS=earnings per share defined

as operating income after tax divided by number of ordinary shares issued; and

PM= profit margin defined as earnings before interest, tax, and extraordinary items

divided by net sales.

ISO FirmPre-ISO Minus

Pre-ISO

Adjusted Value (X)

ControlFirm

ControlFirm

ISO FirmPost-ISO

Post-ISO

Adjusted Value (Y)

Minus

ISO 9000Certification

Year

t = 0

t = -1t = -3 t = -2 t = 1 t = 2 t = 3

Fig. 1. Design for computation of test variables.



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4.4. The data

The financial reports of the 35 ISO 9000 certified companies and 35 non-ISO 9000

certified companies were obtained for up to 3 years prior and 3 years after the ISO 9000

certification year. Fifty-two companies had data for the complete 6-year period and 18

companies had data for four continuous years (see Table 1). Therefore, a total of 384 firm-

year data were used. All data were hand collected.

5. Results

Panel A in Table 2 presents mean-difference statistics for the three performance

measures for the period prior to certification. The data shows that none of the 3-year

average performance measures are significantly different.6

Table 2

Mean differences between ISO 9000 certified and non-ISO 9000 certified firms (n for mean value

calculation = 384 firm-years)

Panel A: Three-year mean differences between ISO 9000 certified and non-ISO 9000 certified firms prior tocertification

Variable ISO Non-ISO t-value p (two-tailed) p (one-tailed)

GSALES# 0.575 0.452 0.653 0.518 ns

EPS 0.202 0.305 0.641 0.526 nsPM 0.076 0.081 0.167 0.869 ns

Panel B: Three-year mean differences between ISO 9000 certified and non-ISO 9000 certified firms following

certification

Variable ISO Non-ISO t-value p (two-tailed) p (one-tailed)

GSALES# 0.221 0.036 1.057 0.298 ns

EPS 0.208 0.048 2.366 0.024 b0.01PM 0.036 0.048 2.082 0.045 b0.025

Panel C: Control-firm adjusted mean differences between the 3-year pre-ISO 9000 certification period and 3-year

post-ISO 9000 certification period

Variable Pre ISO X Post ISO Y t-value p (two-tailed) p (one-tailed)

GSALES# 0.134 0.187 0.209 0.836 nsEPS 0.103 0.161 1.770 0.086 b0.05PM 0.005 0.085 2.078 0.045 b0.025

GSALES= 3-year net sales growth; EPS= operating income after tax divided by number of ordinary shares

issued; PM= earnings before interest, tax and extraordinary items divided by net sales, ns= not significant,

#=after removal of outlier effects, X and Y=refer to Fig. 1.

6

I removed two outliers (greater than two standard deviations from the mean) from GSALES. These related tothe non-ISO group. The matched ISO firms were also removed. Including the outliers resulted in a significant

(p b0.10) difference in GSALES with higher growth for the non-ISO group (mean=7.216) than the ISO group

(mean 0.568). Subsequent analysis excludes the outliers.



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Panel B of Table 2 presents the results for differences in performance in the post-ISO

certification period. The data suggests that the ISO 9000 certified companies had

significantly better performance for GSALES, EPS, and PM. The differences were

significant for EPS (p b0.01) and PM (p b0.05). In order to identify the extent of

improvement in performance and control for differences due to economic factors, testswere conducted on the control-adjusted performance measures (X and Y shown in Fig. 1).

The results for these tests are shown in Panel C.

0

50

100

150

200

250

300

350

-3 -2 -1 0 1 2 3year

$million

ISO NON-ISO

Fig. 2. Total revenue mean value plots for ISO 9000 certified vs. non-ISO 9000 certified firms.

-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

-3 -2 -1 0 1 2 3

year

cents

ISO NON-ISO

Fig. 3. EPS mean value plots for ISO 9000 certified vs. non-ISO 9000 certified firms.



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When differences of the pre-mean (X) and post-mean ( Y) for the three performance

measures are considered, GSALES is not significantly different. EPS and PM however

show significant (p b0.05) differences. The difference in the control-adjusted performance

measures for EPS and PM show that ISO 9000 certified companies significantly improved

their performance over the pre-ISO period and perform better than their matched non-ISO

9000 certified company.The tabulated financial performance results are supported by trajectories reported in

Figs. 2, 3 and 4. Fig. 2 shows ISO 9000 certified firms report increasingly greater total

revenues than non-ISO 9000 certified firms in the years following certification. Similarly,

trajectories for EPS and PM in Figs. 3 and 4, respectively, show differences between the

ISO 9000 certified firms and non-ISO 9000 certified firms in the years following

certification.

5.1. Multivariate analysis

There are two limitations of the univariate tests reported above. First, it does notcontrol for other factors that affect firm performance. Second, the mean difference test

assumes that the rate of change in the pre-ISO 9000 certification measures is equivalent

to the post-ISO 9000 certification measures. I address these limitations through a

multivariate analysis by regressing post-ISO certification performance on pre-ISO

certification performance, company size (SIZE: log of total assets), major source of sales

revenue (SOURCE: foreign=1 or local/regional=0), age of the company (AGE: number

of years listed on SGX or SESDAQ), and ISO status (ISOStatus: ISO 9000 certified=1

and non-ISO 9000 certified=0). I include AGE because Finley and Buntzman (1994)

argued that the age of a company influences its performance. Company SIZE is included

to control for size effects on performance. SOURCE of sales was included because

Singapore companies have domestic and international markets and these can influence

their performance and motivation for seeking ISO 9000 certification. Three OLS

-0.1

-0.05

0

0.05

0.1

0.15

-3 -2 -1 0 1 2 3

year

percentage

ISO NON-ISO

Fig. 4. Profit margin mean value plots for ISO 9000 certified vs. non-ISO 9000 certified firms.



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regressions were estimated for each performance measure. The models took the

following general form:

Post-ISOPerfi a b1SOURCE b2SIZE b3AGE b4Pre ISOPerfi

b5ISOStatus e 4

Where Perfi represents each of the three performance measures; GSALES, EPS, and

PM. Since Hypotheses 1 to 3 posited greater financial performance of ISO 9000 certified

firms relative to non-ISO 9000 certified firms, the coefficient of interest is b5 and the

test criteria is b5N0. The coefficient of interest, b5, measures the change in the mean

value of the relevant performance value (Post-ISOPerfi) if a firm is ISO 9000 certified

relative to a firm not certified, after controlling for the influence of other factors likely to

affect performance. Table 3 presents the regressions results.For each financial performance measure, the pre-ISO 9000 certification performance

measure is statistically significantly associated with the post-ISO 9000 certification

performance. These observations confirm the belief that past performance is related to

future performance and that such effects need to be controlled. They also confirm that

prior studies are limited to the extent that they have not isolated the effects of prior

performance on post-ISO 9000 certification performance and have overstated certification

effects.

The coefficient, b5, on the variable of interest, ISOStatus, is positive and statistically

significantly associated with GSALES (b5=0.130, t=2.249, p b0.05), EPS (b5=0.279,

t=2.577, p b0.05), and PM (b5=0.282, t=2.393, p b0.05). The results for ISOStatussuggests that after controlling for prior performance and other factors, ISO 9000

certification is significantly associated with performance. These results are consistent with

the three research hypotheses that collectively posit post-ISO 9000 certification perform-

ance is greater than the pre-ISO 9000 certification performance.

Table 3

OLS results for effect of ISO 9000 certification on financial performance

Variable Expected GSALES EPS PM

Beta (t value) Beta (t value) Beta (t value)

Constant ? 37.500 (0.609) 34.615 (1.290) 22.869 (1.613)

SOURCE ? 0.016 (0.270) 0.068 (0.619) 0.019 (0.157)SIZE + 0.180 (2.281)** 0.256 (2.230)** 0.062 (0.497)

AGE ? 0.036 (0.606) 0.147 (1.309) 0.198 (1.623)Pre-ISOPerf + 0.751 (10.178)*** 0.360 (3.364)*** 0.183 (1.577)*

ISOStatus + 0.130 (2.249)** 0.279 (2.577)** 0.282 (2.393)**

Adj. R2 0.790 0.231 0.084

Model F 51.445*** 5.152*** 2.257*

Post-ISOPerfi =a +b1SOURCE+b2SIZE+b3AGE+b4Pre-ISOPerfi +b5ISOStatus+e.

SOURCE=1 for majority foreign sales and 0 for regional/local sales; SIZE=log of total assets; AGE=number of

years listed on SGX/SESDAQ, Pre-ISOPerfi =Pre-ISO GSALES: 3-year mean net sales growth for the Pre-ISOcertification period, Pre-ISO EPS: 3-year mean earnings per share for the Pre-ISO certification period, and Pre-

ISO PM = 3-year mean profit margin for the Pre-ISO certification period; and ISOStatus = 1 for ISO 9000 certified

and 0 for non-ISO certified firms. ***p b0.01, **p b0.05, *p b0.10. All tests one-tailed except as indicated.



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Furthermore, b5 suggests that ISO 9000 certification increases the mean value of

GSALES by 13%, EPS by 28% and PM by 28%. These effects suggest that the benefits of

ISO certification come largely from internal efficiencies rather than from external sources

such as growth in sales. In a highly competitive market and mature ISO context such as

Singapore, benefits of ISO are more likely to flow from internal sources. The ISO

companies appear to have significantly improved their performance relative to their non-

ISO counterparts through a genuine commitment to and implementation of quality-

improvement processes. These results also suggest that improvements to performance in

mature ISO contexts are likely to result from continuous enhancements to internal business

processes.

5.2. Sensitivity analysis

I explored the effects of industry membership and year of ISO 9000 certification on the

results reported in Table 3. Since the Singapore government provided incentives to

companies in the building and construction industry that attained ISO 9000 certification, it

is possible that the motive for such companies differs from the motives for companies in

other industries seeking ISO 9000 certification. In addition, companies in the

manufacturing industry may seek certification in response to customer demands. I classify

companies into three broad industry groups; construction, manufacturing, and service and

test for industry effects using two dummy variables in the OLS (Eq. (4)). For the three

performance measures I found that the results (not tabulated) pertaining to the effects of

ISO 9000 certification are consistent with those reported in Table 3. That is, ISO 9000certification continues to have a positive and significant (at least at p b0.025) effect on

post-ISO 9000 certification performance after controlling for industry effects.7

Similarly, for year effects I used a dummy variable that was coded 1 for firms that

attained ISO 9000 certification in 1994 and 0 otherwise. In 1994, 11 (31%) of the

companies in my sample attained ISO 9000 certification, whereas other years had similar

occurrences of certification. Inclusion of year effects in the OLS (Eq. (4)) did not affect the

results relating to the effects of ISO 9000 certification on post-ISO 9000 certification. The

year effect was also not significant (p N0.10) for any of the three performance measures.

Inclusion of industry and year effects together in the OLS (Eq. (4)) produced results

consistent with their effects when isolated.

5.3. Self-selection bias test

The results reported above ignore self-selection inherent in the ISO 9000 certification

decision. If firm characteristics that motivate ISO certification are associated with better

financial performance, then it is likely that the results observed overstate the effects of ISO

9000 certification on performance. Following Kinney and Wempe (2002) and Maddala

(1977), I investigated effects of endogeneity using a two-stage self-selection procedure. In

7 The construction industry variable had a negative and significant (p b0.05) effect on post-ISO 9000

performance for PM and EPS, while the manufacturing industry variable had a negative and significant

(p b0.052) effect on post-ISO 9000 performance for GSALES.



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the first stage, I employed the following PROBIT analysis of ISO 9000 certification choice

where the variables are as previously defined:

ISOj a b1SOURCEj b2SIZEj b3AGEj b4GSALESPREj

b5EPSPREj b6PMPREj uj 5

I included SOURCE, SIZE, and AGE for reasons explained earlier. I included the three

pre-ISO 9000 certification measures of financial performance because firms with superior

performance are likely to seek certification to maintain their performance and, due to their

superior performance, they would be able to afford such initiatives. It is also possible that

firms with lower performance seeking superior performance may attain certification. For

example, firms expanding their market may seek ISO certification for strategic purposes

while those seeking to improve efficiency may also go for certification. ISO 9000certification and improvements to internal business processes are likely to benefit such

firms. ISO was coded 1 for firms that attained certification and 0 otherwise. The

unreported results indicated no significant effect for any of the variables at p b0.10. This

suggests that the sample firms were relatively homogenous. The second stage test

comprised of separate analysis for the two sub-samples of ISO 9000 certified and non-

certified firms. The following model was estimated for each of the three financial

performance measures:

Post-ISOPerfi a b1SOURCE b2SIZE b3AGE b4Pre ISOPerfi

b5MISONISO e 6

In Eq. (6), MISO and MNISO are selectivity variables. For the ISO certified sub-sample

equation, MISO is f(bVZ)HF(bVZ) and for the non-certified sub-sample MNISO isf(bVZ)H (1F(bVZ)). bVZ is the prediction from the first-stage PROBIT model and f(d ) andF(d ) are the density and distribution functions of the standard normal distribution.8 The

test condition for selectivity bias is a negative and significant b5. The unreported results

indicated that for each of the three performance measures for both sub-samples b5 was not

significant at p b0.10. Thus, there is no evidence to suggest that self-selection bias affects

the results.

6. Conclusion

This study sought to investigate whether ISO 9000 certification is associated with

financial performance measures at the organizational level. The study makes several

contributions to the literature. First, using a sample of 35 ISO 9000 certified firms

across a range of industries and 35 non-ISO certified companies matched on size and

industry, I investigated whether ISO certification was associated with improvements

8 For a comprehensive discussion of the self-selection bias tests, refer to Maddala (1977, pp. 351366, 1983,

pp. 257290).



20/22

(as opposed to differences between ISO and non-ISO firms at a point in time) in

objective measures of financial performance such as EPS, Profit Margin, and Growth

in Sales. I employed an appropriate design that permitted investigating the extent of

improvement in performance following ISO certification. Second, the relationship

between ISO 9000 certification and performance was investigated in an emerging

market that had a mature ISO outlook. A mature ISO context enabled me to study the

real benefits of ISO 9000 certification arising from improvements to the internal

business processes rather than due to a bfirst moverQ effect. In doing so, this study

provides the first reliable evidence of the impact of ISO 9000 certification on financial

performance at the organizational level.

The results of this study provide evidence that ISO 9000 certification is associated

with improvements in financial performance. They suggest that ISO 9000 certification

does bring benefits to the firm and its stakeholders. Specifically, the multivariate testsshowed that ISO 9000 certification is associated with significant improvements in profit

margin, growth in sales, and earnings per share. However, the effect of ISO 9000

certification was greater on profit margin than on growth in sales. This suggests that the

improvement in overall performance is attributed largely to improvements in internal

business processes. Thus, in a mature ISO context such as Singapore, ISO 9000

certification appears to affect firm performance through internal sources focused on

improving quality-related processes. It appears from the data analyzed in this study that

ISO 9000 could be an important strategic initiative because it does impact the bottom

line through enhancements to internal business processes. Firms not certified but

considering ISO 9000 certification are likely to benefit financially from attaining ISOstatus. Finally, the evidence here also suggests that ISO 9000 has credibility and

supports the literature on the self-rated benefits of ISO 9000.

There are a few limitations in this study. First, the results of this study are not

generalizable to non-listed companies and SMEs. Future research could consider such

companies because they play major roles in world economies. However, data

availability is likely to limit such investigations. Second, I cannot rule out the

possibility that other variations in firm characteristics and endogenous factors

influenced the observed performance differences.9 More complex and intricate models

are required to explore such effects and are left to future research. Third, due to the lack of

objective and sufficient information, the study did not examine other financial measuressuch as inventory turnover, cost of goods manufactured/services provided, and internal

and external failure costs that could more directly capture the effects of ISO 9000

certification. Other financial performance measures such as EVA could be considered.

Future research could investigate the causal effects of ISO certification on non-financial

measures and consequently on financial measures. Fourth, the period of the study was

one where Singapore companies implemented other quality initiatives such as JIT,

total quality management, and cellular manufacturing technology. The extent to

which these practices varied between the ISO and non-ISO certified companies and

9 This is a common, inherent limitation of studies examining the association between quality initiatives and

performance (see also Balakrishnan et al., 1996; Ittner & Larcker, 1995; Kinney & Wempe, 2002; Simmons &

White, 1999).



21/22

within the ISO certified firms could not be determined. Therefore, the results of the study

must be interpreted cautiously. Future research could explore the effect of quality

initiatives and ISO certification on financial performance. Finally, no attempt was made to

investigate the effect of types of ISO 9000 certification on performance due to limited

information and the small sample size. This is another issue that could be explored in

future research.

Acknowledgements

I wish to thank to Pei Szu, Li Pei, and Hui Rong for their research assistance and Hesan

A. Quazi for his comments.

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