Financial Performance as Leading Indicator of Nonfinancial Performance: Evidence from Panel VAR Estimations
51 Pages Posted: 9 Jan 2019
Date Written: December 04, 2018
Prior research finds that nonfinancial performance measures can be leading indicators of financial performance. However, these findings focus on the effect of nonfinancial performance on future financial performance and implicitly assume that nonfinancial performance is exogenous. We argue that the reverse effect also exists, i.e., firms with good prior financial performance can increase nonfinancial performance. Using the example of customer satisfaction, we rely on panel vector autoregressive models to estimate the dynamic bidirectional relationship between customer satisfaction and firm profitability for 248 companies in the United States over 22 years. We show that because of the bidirectional relationship the effect of customer satisfaction on future profitability is substantially stronger than suggested in prior work. Furthermore, we show that the bidirectional relationship is stronger for companies facing external financing constraints, companies operating in less competitive markets, and companies facing non price-based competition.
Keywords: performance measures, nonfinancial leading indicators, bidirectional relationships, dynamic relationships
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