The Role of Nonfinancial Measures in Performance Evaluation

Abstract

This paper investigates the conditions where the use of nonfinancial measures in performance evaluation increases firm value. While some empirical studies conclude that nonfinancial performance measures have a positive effect on firm value, others find to contrary. Using a multi-task agency model, I find that the work environment for employees determines whether firms use nonfinancial measures. However, even where firms use nonfinancial performance measures, it may have a negative effect on firm value because these measures distort the allocation of effort across tasks.