Relevance of Financial and Non-Financial Measures to Financial Analysts: Experimental Evidence

Abstract

This research explores the role of financial and non-financial measures on analysts' recommendations. Specifically, for different combinations of the measures' favorableness, we examine analysts' recommendation ratings to invest in a firm, and if yes, the length of the time horizon of their recommendation, and the weights they assign on the measures in making the above decisions. The participants were 119 financial analysts. The results indicate financial and non-financial measures have a complementary effect on analysts' ratings to invest in firms. However, while the effect of financial (non-financial) measures on ratings changes depending on whether the non-financial (financial) measures are favorable or unfavorable, the effect on the ratings is significantly greater from improved favorableness of financial measures. Also, favorableness of the measures affects the weights assigned to them and the time horizon of the analysts' recommendation. Specifically, when financial measures are unfavorable, analysts explicitly weighted them more heavily than they did to the non-financial measures, irrespective of the latter's favorableness. However, when the financial measures are favorable, they are weighted less heavily than non-financial measures. For recommendations' time horizon, non-financial measures are given greater importance than financial measures. Further, when non-financial measures are favorable, the interaction of the weights analysts put on these measures and recommendations' time horizon significantly influences their ratings. That is, the future value-creating implications of non-financial measures are encapsulated in both the time horizon and the weightings of these measures when analysts rate their recommendations to investment in a firm. But the interaction of time horizon and the weights assigned to financial measures is significant only when the non-financial measures are favorable. Thus, it appears that the presence of favorable non-financial measures gives favorable financial measures a sense of having some future value-creating implications. Overall, the results underline the importance of both financial and non-financial measures to financial analysts.