Are Nonfinancial Measures Leading Indicators of Financial Performance? An Analysis of Customer Satisfaction

This paper examines three questions on the value relevance of customer satisfaction measures: (1) Are customer satisfaction measures leading indicators of accounting performance? (2) Is the economic value of customer satisfaction (fully) reflected in contemporaneous accounting book values? And (3) Does the release of customer satisfaction measures provide new or incremental information to the stock market? Many argue that improvements in areas such as quality, customer or employee satisfaction, and innovation represent investments in firm-specific assets that are not fully captured in current accounting measures. According to these authors, nonfinancial indicators of investments in intangible assets may be better predictors of future financial (i.e., accounting or stock price) performance than historical accounting measures, and should supplement financial measures in internal accounting systems (e.g., Deloitte Touche Tohmatsu International [1994] and Kaplan and Norton [1996]).