Financial Performance as Leading Indicator of Nonfinancial Performance: Evidence from Panel VAR Estimations

51 Pages Posted: 9 Jan 2019

See all articles by Maximilian Margolin

Maximilian Margolin

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM)

Matthias D. Mahlendorf

Frankfurt School of Finance & Management

Utz Schäffer

WHU Otto Beisheim School of Management

Date Written: December 04, 2018

Abstract

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

Suggested Citation

Margolin, Maximilian and Mahlendorf, Matthias D. and Schäffer, Utz, Financial Performance as Leading Indicator of Nonfinancial Performance: Evidence from Panel VAR Estimations (December 04, 2018). Available at SSRN: https://ssrn.com/abstract=3307490 or http://dx.doi.org/10.2139/ssrn.3307490

Maximilian Margolin (Contact Author)

Erasmus University Rotterdam (EUR) - Rotterdam School of Management (RSM) ( email )

P.O. Box 1738
Rotterdam, 3000 DR
Netherlands

Matthias D. Mahlendorf

Frankfurt School of Finance & Management ( email )

Adickesallee 34
Frankfurt, DE RLP 60322
Germany

Utz Schäffer

WHU Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, D-56179
Germany

HOME PAGE: http://www.whu.edu/controlling

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