Nonfinancial Factors as Predictors of Value Creation: Finnish Evidence

Abstract

The purpose of the research is to analyse the ability of nonfinancial factors to predict value creation in Finnish technology firms. Nonfinancial factors are defined in terms of a large set of variables on organizational characteristics, strategy, competitive stance, consistency of performance measurement, management control systems (MCSs), and quality of MCSs. Financial ratios are used as a benchmark. The hypotheses are that, firstly, nonfinancial factors include important information for prediction and, secondly, that they provide incremental information over financial ratios. The nonfinancial variables are drawn from a postal survey carried out in 1999. Financial variables for 1998–2001 are obtained for 40 private firms of the 110 firms responding to the survey. Shareholder value is estimated on the basis of the four‐year financial data for 2001. This value divided by the shareholder book value (estimated‐to‐book value ratio, EBV) as well as its drivers are predicted by past non‐financial and financial data. Partial Least Squares (PLS) method is used to analyse the importance of information in prediction. The results give support to the hypotheses. Moreover, the results show that nonfinancial factors yield important incremental information over financial ratios when predicting value drivers, that is, growth, profitability, and risk. Especially, financial ratios are weak in predicting growth.

Citation

Laitinen, E.K. (2004), "Nonfinancial Factors as Predictors of Value Creation: Finnish Evidence", Review of Accounting and Finance, Vol. 3 No. 3, pp. 84-130. https://doi.org/10.1108/eb043409