The Moderating Role of Competition in the Relationship between Nonfinancial Measures and Future Financial Performance

Posted: 5 May 2011

See all articles by Rajiv D. Banker

Rajiv D. Banker

Temple University - Department of Accounting

Raj Mashruwala

University of Calgary

Date Written: September 30, 2006

Abstract

The mixed results from earlier studies examining the links between nonfinancial measures and financial performance suggest that contextual variables may moderate these relationships. We use data from more than 800 stores of a retail chain to assess whether the relationship between nonfinancial measures such as employee satisfaction and customer satisfaction, and financial performance is influenced by the competitive characteristics of retail store locations. We model and estimate the relationship between employee satisfaction, customer satisfaction and earnings, controlling for past earnings to evaluate whether these nonfinancial measures are lead indicators of financial performance. In doing so, we examine the role of competition as a moderating variable in these relationships. We find that nonfinancial measures have significant incremental information content in predicting future store profitability only in the high-competition urban locations. In additional tests we estimate whether these nonfinancial measures are correlated with subjective information that senior management implicitly relies on when evaluating the performance of store managers and selecting stores for closure. The study underscores the importance of understanding the context when using nonfinancial measures as an integral part of the management control system.

Keywords: Customer satisfaction, Employee satisfaction, Nonfinancial performance measures, Retail industry

JEL Classification: M410, M490, J280, L810, M310

Suggested Citation

Banker, Rajiv D. and Mashruwala, Raj, The Moderating Role of Competition in the Relationship between Nonfinancial Measures and Future Financial Performance (September 30, 2006). Contemporary Accounting Research, Vol. 24, No. 3, 2007. Available at SSRN: https://ssrn.com/abstract=501502

Rajiv D. Banker

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Raj Mashruwala (Contact Author)

University of Calgary ( email )

2500 University Drive NW
Calgary, Alberta T2N 1N4
Canada
403-220-4332 (Phone)

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