Worldwide Investor Preferences for Performance Measures

by R. Christopher Small, for The Harvard Law School Forum at Harvard Law School, January 19, 2010.

In our paper, Which Performance Measures Do Investors around the World Value the Most – and Why?, which was recently accepted for publication in the Accounting Review, we examine the value relevance of a comprehensive set of summary performance measures including sales, earnings, comprehensive income, and operating cash flows.

Academics and practitioners have recently begun to move away from proposing “better” measures of earnings to instead focusing on earnings quality attributes—such as persistence, predictability, smoothness, and timeliness—that may make a particular earnings measure more useful in equity valuation, especially if such attributes capture some dimension of information risk about the firm’s future performance.

Our goal in this paper is to develop an empirical description of the underlying constructs reflected in common performance measure attributes, and to generalize that description to multiple performance measures for firms in the global capital market. To this end, we estimate the persistence, predictability, smoothness, contemporaneous and lagged association with operating cash flows, timeliness, and conservatism of eight different summary performance measures for almost 20,000 firms in 46 countries during 1996–2005. Our eight performance measures are sales, EBITDA, operating income, income before income taxes, income before extraordinary items and discontinued operations, net income, total comprehensive income, and operating cash flows…(continue reading)

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