The Effect of Positive and Negative Financial and Nonfinancial Performance Measures on Analysts' Recommendations

ABSTRACT This research experimentally examines the favorable/unfavorable outcomes of a firm's financial and nonfinancial performance measures on financial analysts' recommendation to divest or invest in a firm. The participants were financial analysts who made recommendations ranging from “definitely sell” to “hold” to “definitely buy.” The results show that financial and nonfinancial performance measures and their favorableness have an interactive impact on analysts' recommendations. To be precise, the recommendations were very close to the “definitely sell” anchor when the performance was unfavorable, irrespective of whether the measures presented were financial or nonfinancial. Further, favorableness of performance on nonfinancial measures appears to be irrelevant when performance on financial measures is unfavorable. However, when performance on financial measures is favorable, the effect of nonfinancial performance had a differential effect on analysts' recommendations depending on whether these measures indicated favorable or unfavorable performance. Specifically, when nonfinancial performance was unfavorable, the recommendations were closer to “hold” on average, but the recommendations were closer to “definitely buy” on average when nonfinancial performance was favorable. These results are consistent with our expectations. Overall, given that more and more firms are disclosing nonfinancial measures along with the traditional financial measures, and with an increasing number of firms reporting unfavorable financial performance, the results of this research underline the importance of considering both financial and nonfinancial measures and their outcomes—favorable and unfavorable—on analysts' recommendations. Data Availability: Please contact the authors.