Which Performance Measures do Investors Value the Most - and Why?

Abstract

We examine the value relevance of a comprehensive set of summary performance measures including sales, earnings, comprehensive income, and operating cash flows. We find that, while value relevance peaks for measures above the line, no single measure dominates for firms across the world. Instead, we find a performance measure more relevant when it captures in a more direct and timely fashion information about firms' cash flows. Specifically, for each performance measure by country, we estimate eight attributes commonly used by accounting researchers to assess earnings quality. We find these attributes highly correlated-most of their variance can be explained by only two principal factors. A factor capturing nearness to cash flows is positively associated with a performance measure's value relevance; a factor reflecting the measure's persistence, predictability, smoothness and conservatism is negatively associated. Together, our results suggest that, when it comes to equity valuation, accounting researchers and standard setters should focus not on what performance measure is best at one point in time, but on the underlying attributes that investors find most relevant.