ARE FINANCIAL MEASURES LEADING INDICATORS TO FIRM PERFORMANCE?

Victor Bahhouth
Ramin Maysami
Rebecca Gonzalez
The University of North Carolina- Pembroke
ABSTRACT
One of the key elements that investors need is a set of indicators that could be used as
leading measures to predict firm performance and help them make sound investment decisions.
Many of the financial measures that are published regularly are a combination of fundamental
measures that are used to assess a firm’s past performance and market measures that are used to
assess a firm’s stock price. The purpose of this paper is to study if a set of both measures could be
used as leading measures to predict firm performance and accordingly help investors to make
better investment decisions. The study develops a scenario that uses a selected set of fundamental
and market measures as leading measures at certain points in the past and then examines the
correlation between these measures and firm performance at relative future periods. The results of
the study showed that none of the fundamental or market measures are a proper fit as leading
measures except for price-earnings ratio, which showed a reliability of less than 5%.