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The Relative and Incremental Value Relevance of Nonfinancial Information

With the changes in the business environment, the ability of financial information to adequately reflect a firm's value is increasingly being questioned. To overcome the shortcomings of the accounting-based performance systems, nonfinancial information is required to be added to the performance systems. Recent years, the changes in the performance measures from accounting-based to integrated performance systems have also occurred in China. Therefore, it is worth investigating the relationship of nonfinancial information and a company's value based on the Chinese stock market. In the paper, the relative and incremental value relevance of nonfinancial information is investigated based on a sample of 648 listed companies who disclose R&D expenditures in Shanghai Stock Exchange from 2001 to 2006. R&D intensity is used as the proxy of nonfinancial information. It is found that: (1) Financial information is still value relevant; (2) R&D intensity is value relevant; (3) R&D intensity has incremental information over financial information. Our study is the first study on the incremental value relevance of R&D intensity in China. Regarding to the findings, we suggest that companies should spend more money on the R&D activities and disclose their R&D expenditures.