Using Nonfinancial Information to Predict Financial Performance: The Case of the U.S. Airline Industry

Abstract

To enhance traditional financial reporting, academics and policymakers have suggested that financial statement users be provided with nonfinancial performance information that may enhance users' ability to evaluate and predict financial performance. This study tests this proposition by examining whether timely nonfinancial performance information is a useful predictor of financial performance in the airline industry. From analysts' written pronouncements and financial press articles we identify a number of fundamental metrics, including customer satisfaction, purportedly used by analysts and investors to assess airline performance. We empirically examine these metrics and find that on-time performance, mishandled baggage, ticket oversales, and in-flight service are significantly associated with our proxy for customer satisfaction. Using an instrumental variable for customer satisfaction, we find that customer satisfaction, load factor, market share, and available ton miles are contemporaneously associated with operating income and revenues and that customer satisfaction and available ton miles are contemporaneously associated with expenses. Finally, using one and two months of nonfinancial data, we find that nonfinancial performance information appears to be useful in predicting quarterly revenues, expenses, and operating income.