Nonfinancial Information and Accounting: A Reconsideration of Benefits and Challenges

SYNOPSIS: Recent years have seen widespread interest in supplementing or replacing accounting information with nonfinancial information (NFI) in a variety of uses such as incentive compensation, prediction of costs and profits, and firm valuation. The joint use of NFI and accounting has had mixed results, however. Research has documented benefits to such use but has also documented significant challenges. This commentary summarizes research that addresses two particularly important challenges in using combinations of accounting and NFI: measuring nonfinancial performance accurately and weighting measures appropriately when multiple accounting and nonfinancial measures are used together. These challenges are related, in that the nature and magnitude of measurement error helps to determine appropriate weights on multiple measures. Two common themes appear in strategies for dealing successfully with these challenges. The first is that matching information properties to decision types can limit the need for c...

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