Which Performance Measures do Investors Value the Most - and Why?

47 Pages Posted: 16 Aug 2008 Last revised: 21 Apr 2009

See all articles by Jan Barton

Jan Barton

Emory University

Bowe Hansen

Virginia Commonwealth University

Grace Pownall

Emory University - Department of Accounting

Date Written: January 23, 2009

Abstract

We examine the value relevance of a comprehensive set of summary performance measures including sales, earnings, comprehensive income, and operating cash flows. We find that, while value relevance peaks for measures "above the line," no single measure dominates for firms across the world. Instead, we find a performance measure more relevant when it captures in a more direct and timely fashion information about firms' cash flows. Specifically, for each performance measure by country, we estimate eight attributes commonly used by accounting researchers to assess earnings quality. We find these attributes highly correlated-most of their variance can be explained by only two principal factors. A factor capturing nearness to cash flows is positively associated with a performance measure's value relevance; a factor reflecting the measure's persistence, predictability, smoothness and conservatism is negatively associated. Together, our results suggest that, when it comes to equity valuation, accounting researchers and standard setters should focus not on what performance measure is "best" at one point in time, but on the underlying attributes that investors find most relevant.

Keywords: summary performance measure, earnings attributes, value relevance, international accounting standard setting

JEL Classification: G12, G18, M41, M43, M44, M47

Suggested Citation

Barton, Jan and Hansen, Thomas Bowe and Pownall, Grace, Which Performance Measures do Investors Value the Most - and Why? (January 23, 2009). Available at SSRN: https://ssrn.com/abstract=1230562 or http://dx.doi.org/10.2139/ssrn.1230562

Jan Barton (Contact Author)

Emory University ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States
404-727-6398 (Phone)
404-727-6313 (Fax)

Thomas Bowe Hansen

Virginia Commonwealth University ( email )

Richmond, VA 23284
United States

Grace Pownall

Emory University - Department of Accounting ( email )

Goizueta Business School
1300 Clifton Road
Atlanta, GA 30322
United States

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