16 Metrics

16.1 Finance

16.1.1 Return on Investment (ROI)

\[ ROI = \frac{\text{Net Profit}}{\text{Investment}} \]

Similarly, return on marketing investment

\[ ROIM = \frac{IRAM - CM}{MS} \]


  • IRAM = Incremental Revenue Attributable to Marketing
  • CM = Cost of the Marketing Investment
  • MS = Marketing Spending

If ROMI is positive, then firm is on doing well.

16.1.2 Economic Value Added

  • also known as economic profit.
  • is a measure based on the residual wealth calculated by deducting its cost of capital from its operating profit, adjusted for taxes on a cash basis.
  • measures the value a company generates from its invested funds.
  • EVA relies heavily on invested capital. Hence, more suitable for asset-rich companies, whereas companies with intangible assets, such as technology businesses, may not be good candidates.

\[ EVA = NOPAT - (Invested Capital * WACC) \]


  • NOPAT = Net Operating profit after taxes = Operating Profit x (1-Tax Rate)

  • Invested capital = Debt + capital leases + shareholders’ equity = Equity + long-term debt at the beginning of the period

  • WACC = Weighted average cost of capital (average rate of return a company expects to pay its investors).

    • \(WACC = \frac{Ke \times E}{E+D} + \frac{Kd \times (1-t) \times D}{E +D }\)

      • Ke = required return on equity
      • Kd(1-t) = after tax return on debt.
  • (WACC* capital invested) is also known as a finance charge

Invested capital can also be calculated as (Total Assets - Current Liabilities). Hence, the modified version of EVA is:

\[ EVA = NOPAT - (\text{total assets} - \text{current liabilities}) * WACC \]

16.1.3 Market Value Added

  • is the amount of wealth that a company is able to create for its stakeholders since its foundation.
  • (the current market value of the company’s stock - the initial invested capital)

\[ MVA = \text{market value of shares (or enterprise value)} - \text{book value of shareholders' equity} \]

16.1.4 Unexpected size-adjusted advertising investments

(Chakravarty and Grewal 2016; Kim and McAlister 2011; Y. Liu, Shankar, and Yun 2017) used

16.1.5 Shareholder Complaints

(Wies et al. 2019) used data from RiskMetrics

16.1.6 Profitability

(Grewal et al. 2008; McAlister et al. 2016)

\[ \text{profitability} = \frac{\text{operating income before depreciation}}{\text{total assets}} \]

16.1.7 Firm Size

(Grewal, Chandrashekaran, and Citrin 2010; McAlister et al. 2016; Nezami, Worm, and Palmatier 2018) used log of total asset in million as firm size

\[ \text{firm size} = \log (\text{total assets}) \]

16.1.8 Sales Growth

(Grewal, Chandrashekaran, and Citrin 2010; Nezami, Worm, and Palmatier 2018; V. R. Rao, Agarwal, and Dahlhoff 2004)

Percentage change in gross sales = sales growth

16.1.9 Financial Flexibility

16.1.10 Cash flows

(Chakravarty and Grewal 2011; Malshe and Agarwal 2015) Cash flows = log(operating cash flow in mil)

16.1.11 Financial Leverage

(Kashmiri and Mahajan 2017; Chakravarty and Grewal 2011)

\[ \text{financial leverage} = \frac{\text{long-term debt}}{\text{book value of assets}} \]

16.1.12 Stock return

(Markovitch, Steckel, and Yeung 2005; Chakravarty and Grewal 2011, 2016) used dummy if stock returns exceed industry averaged stock returns

16.1.13 Financial Flexibility

16.1.14 Net Contribution

Net contribution = gross margin x sales - cost of marketing

\[ NC = m \times S(a) -ka \]

All data without CSRP come from Compustat/Fundamentals
Variable Data Item Source
Book Value on Equity PRCC_C x CSHO

PRCC_C: CRSP/Annual Update/CRSP/Compustat Merged/Fundamental Annual/Supplemental Data Items

CSHO: CRSP/Annual Update/CRSP/Compustat Merged/Fundamental Annual /Miscellaneous Items

CAPEX CAPX Cash Flow Items
Capital Intensity CAPX / AT

CAPX: Cash Flow Items

AT: Balance Sheet Items

Cash CH Balance Sheet Items
Cash and short-term Investments CHE Balance Sheet Items
Cash Flow \(\frac{IBC + DP}{AT}\)

IBC: Cash Flow Items

DP: Income Statement Items

AT: Balance Sheet Items

Cash Holdings \(\frac{CHE}{AT}\)

CHE: Balance Sheet Items

AT: Balance Sheet Items

Closing Price (annual, calendar) PRCC_C Supplement Data Items

Closing Price

(annual, fiscal)

PRCC_F Supplement Data Items
Cost of Capital \(\frac{XINT}{DLC}\)

XINT: Income Statement Items

DLC: Balance Sheet Items

Current Assets Total ACT Balance Sheet Items
Current Liabilities LCT Balance Sheet Items
Debt in Current Liabilities DLC Balance Sheet Items
Dividends (common) DVC Income Statement Items
Dividends (preferred) DVP Income Statement Items
Dividends (total) DVT Income Statement Items
Earning per Shares \(\frac{NI}{CSHO}\)

NI: Income Statement Items

CSHO: Miscellaneous Items

EBIT EBIT Income Statement Items
EBITDA EBITDA Income Statement Items
Equity Book Value BKVLPS Balance Sheet Items
Firm Size log(AT) AT: Balance Sheet Items
Income before Extraordinary Items IB Income Statement Items
Interest on long-term debt UXINTD Income Statement Items
Interest on short-term Debt UXINST Income Statement Items
Leverage \(\frac{DLTT + DLC}{SEQ}\) Balance Sheet Items
Long-term Assets AT - ATC Balance Sheet Items
Long-term Debts DLTT Balance Sheet Items
Market to Book Ratio \(\frac{MKVALT}{BKVLPS}\)

MKVALT: Supplement Data Items

BKVLPS: Balance Sheet Items

Market Value MKVALT or CSHO x PRCC_F

MKVALT: Supplement Data Items

CSHO: Miscellaneous Items

PRCC_F: Supplement Data Items

Net income (Loss) NI Income Statement Items
Payout Ratio \(\frac{DVP + DVC + PRSTKC}{IB}\)

DVP: Income Statement Items

DVC: Income Statement Items

PRSTKC: Cash Flow Items

IB: Income Statement Items

Property, Plant, and Equipment PPENT Balance Sheet Items
Purchase of common and preferred Stocks PRSTKC Cash Flow Items
R&D Intensity \(\frac{XRD}{AT}\)

XRD: Income Statement Items

AT: Balance Sheet Items

ROA \(\frac{NI}{AT}\)

NI: Income Statement Items

AT: Balance Sheet Items


NI: Income Statement Items

CSHO: Miscellaneous Items

PRCC_F: Supplement Data Items

ROI \(\frac{NI}{ICAPT}\)

NI: Income Statement Items

ICAPT: Balance Sheet Items

Sale SALE Income Statement Items
Short-term Liabilities APC Balance Sheet Items
Stockholders Equity (total) SEQ Balance Sheet Items
Tangibility \(\frac{PPENT}{AT}\)

PPENT: Balance Sheet Items

AT: Balance Sheet Items

Tobin’s Q \[AT + (CSHO x PRCC_F) - CEQ\]/(AT)

AT: Balance Sheet Items

CSHO: Miscellaneous Items

PRCC_F Supplement Data Items

CEQ: Balance Sheet Items

Total Assets AT Balance Sheet Items
Total Equity PSTKC + CSHO

PSTKC: Balance Sheet Items

CSHO: Miscellaneous Items

Total Liabilities LT Balance Sheet Items

Information is taken from WRDS Data Items

Variable Data Item Data Source
Market Cap/ GDP series GDPA (U.S. Bureau of Economic Analysis)
Tobin’s q (AT (CSHO * PRCC_F) - CEQ)/(AT)
Market cap (000s) \(prc \times shrout\) CRSP
Small firm Market cap < $ 100M

Revenue Herfindahl

(for each 3-digit NAICS in each year)

\(\frac{revt^2_i}{\sum_1^n revt}\) where \(i\) = the firm, \(n\) = firms in the same industry
Capital Expenditures / Assets \(\frac{capx}{lag(at)}\)
R&D/Assets \(\frac{xrd}{lag(at)}\) If R&D is missing, set to 0
Fixed Assets/ Assets \(\frac{ppent}{at}\)
Inventory / Assets \(\frac{invt}{at}\)
Cash / Assets \(\frac{che}{at}\)
Operating cashflow / assets \(\frac{oidbp - xint - txt}{lag(at)}\) Operating income before depreciation (oibdp) minus interest (xint) minus taxes (txt), divided by lagged assets
Loss firms % of firm with net income (ni) < 0
R&D-adjusted operating cash flow/ assets \(CF/at + RD/ at\)
ROA \(\frac{ib}{at}\)
Book Leverage \(\frac{dltt + dlc}{at}\)
Market leverage (dltt + dlc)/(at - ceq + (chso x prcc_f)
Net Leverage \(\frac{dltt + dlc - che}{aat}\)
Negative net leverage firms % of firms with Net Leverage < 0
Interest/ Assets \(\frac{xint}{lag(at)}\)
No debt firms % with no dltt or dlc
Net equity issuance \(\frac{sstk - prstkc}{lag(at)}\)
Institutional ownership % of shares outstanding held by institution Thomson Financial 13f data
Blockholder % of firms with an institutional owner who holds 10 percent or more of outstanding shares Thomson Financial 13f data
Payout Policy
Dividend paying firms % of firms with dvc > 0
Dividends / Assets \(\frac{dvc}{lag(at)}\)
Repurchase / Assets \(\frac{prstkc - pstk}{lag(at)}\)
Total payout/ assets \(\frac{dvc + prstkc}{lag(at)}\)
Total payout/ Net income \(\frac{dvc+ prstkc}{ni}\)

Info from (Kahle and Stulz 2017) Appendix

16.2 Marketing

16.2.1 Trust

Measuring trust algorithmically using social media data (Roy et al. 2017)