Development Of Measurement Model

The increasing use of structural equation modeling provides social scientists with a powerful analytic tool for describing the interrelations of both manifest and latent variables (Anderson and Gerbing, 1988). Although a number of writers recommend (Loehlin, 1998) simultaneous solutions of the measurement model and the structural model, the two-step approach (Anderson and Gerbing, 1988) presents some unique advantages by separating the two phases. The study presented here performs the first step of the two-step approach; that of developing a measurement model with confirmatory factor analysis (Hatcher, 1994).

The data are from a correlation matrix produced in a study (Hitt et al., 1996) of the relationship of the market for corporate control, management control systems, and firm innovation. This study included both archival and survey data from a sample of 250 industrial manufacturing firms. The use of archival data is common in the strategic management literature and, although based on self-reported data, is considered reliable. Past research has demonstrated the general reliability of self-reported performance data (Dess & Robinson, 1984), for the publishers of these data sources use in-house control procedures to verify the accuracy of their reporting. A correlational analysis of the data from the original company reports against the data reported by the publishers would likely yield a high correlation coefficient (Richard A. Johnson, personal communication, April 18, 2000). Hence, the secondary data used in organizational studies can be considered highly reliable. The survey data were collected from CEOs or their designees and exhibited a 36.9 percent response rate (Hitt et al., 1996). Thus, the correlation matrix used in this project was produced from real-world data collected from both primary and secondary sources. The general area of study and type of data used having been identified; it is necessary to review the theoretical framework and basis for the model before developing the measurement model.

THEORETICAL FRAMEWORK AND MODEL SPECIFICATION

The measurement model specifies the relationships between the latent constructs and the manifest variables with the constructs allowed to covary freely (Anderson and Gerbing, 1988). This particular measurement model is the first stage of a two-stage approach that ultimately relates the market for corporate control, the use of managerial control systems, and firm innovation (Hitt et al, 1996).

The market for corporate control is the buying and selling of firms on the open market (Manne, 1965). It is seen as a mechanism of last resort when the function of the board of directors to monitor and control the firm is thought to have failed (Jensen, 1988; Morck, Shleifer, and Vishny, 1989Walsh and Kosnik, 1993). Hence, the market for corporate control consists of the activities, acquisitions and divestitures. Two indicators, number of acquisitions made and the percentage of sales acquired, measured acquisition intensity. Two different indicators measured divestiture intensity, number of divestitures completed and the percentage sales divested (Hitt et al, 1996).

The theoretical framework for managerial control systems is rooted in the larger concept of supervisory control, which specifies two primary forms of control. Supervisors monitor and control the performance of their direct reports either by monitoring their behavior in carrying out their tasks, behavioral control, or by monitoring and responding to the results of their behavior in carrying out their tasks, output control (Daft, 1998). In the case of divisional management, those responsible for strategic business units, performance is monitored and controlled by senior management either by observation and involvement in formulating and implementing strategic plans, strategic control, or by monitoring and responding to financial outcomes of divisional managers' performance, financial control (Baysinger, and Hoskisson, 1990). Four survey items assessing the importance to senior managers of financial criteria in evaluating divisional managers serves as indicators of financial control. These were 1) return on investment criteria, 2) cash flow, 3) objective strategic criteria such as financial measures, and 4) formal reports received by senior management from the firms' management information systems (Hitt et al., 1996). Three survey items assessing the importance to senior managers of external and internal information in evaluation divisional managers measured strategic control. These three items were 1) formal face-to-face meetings, 2) informal face-to-face meetings, and 3) subjective strategic criteria, such as the characteristics of the firm's marketing strategy.

Firm innovation, the introduction of new products and processes in order to attain and maintain competitive advantage (Franko, 1989) is characterized as consisting of either internal innovation, developing new products or processes in-house, or external innovation, buying firms with existing product or processes (Hitt et al, 1996). On this basis, manifest variables thought to measure internal innovation are firm research and development (R & D) intensity, a firm's reported R & D expenditures per $1,000 in sales, and new product intensity, announcements (news releases) of the introduction of all types of new products and services, processes, technologies, modifications, or license agreements for the two-year period 1991-1992 (Hitt et al., 1996). Three survey items describing the importance of external innovation to the firm measured external innovation. The three items were 1) external acquisition of new products, 2) external acquisition to develop new processes, and 3) external acquisition to develop new markets (Hitt et al., 1996).

In summary, three overarching concepts make up the theoretical model whose measurement model is the basis of this project. The three concepts, the market for corporate control, internal control systems, and firm innovation each represent two types of activities. The market for corporate control, buying and selling firms, consists of acquisition intensity and divestiture intensity; internal control systems, the mechanism whereby senior management evaluates the performance of divisional management, consist of a major emphasis on either financial control or strategic; and firm innovation, consists of either internal development efforts or of acquisition of another firm's development capacity.

Examination of the RAM diagram is a first step in analyzing this structural equation model. All exogenous variables have slings, and there are no slings to endogenous variables. Further, there are slings between most pairs of exogenous variables. One exception is the covariance