Earnings, Cash Flows and Value-Added as Performance Metrics: an International Comparison
The measurement of a firm's performance is a crucial issue for many of its stakeholders: shareholders, directors, managers and debtholders. In addition, the effectiveness of many management systems (performance evaluation, compensation, strategy implementation) as well as their impact on value creation depends on the selection of an appropriate performance metric. This study purports to compare the ability of five performance metrics to capture value and value creation. These measures are net earnings, operating earnings, cash flows from operations, residual income and value added. Since country-specific standards and regulations influence the computation of performance metrics, the sample comprises firms from four countries: the United States, Canada, France and Switzerland. Results suggest that the value relevance of a performance metric as well as its predictive ability depends on a country's financial measurement and reporting environments. A financial reporting environment that is investor-focused and less restrictive enhances the power of performance metrics to explain a firm's value or financial prospects. In contrast, a national accounts focus and a more restrictive reporting environment reduce the explanatory power of performance metrics.
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