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05 Dec. 2018 | Comments (0)

An organization’s culture of innovation can be a robust predictor of financial performance, as measured by the cash flow multiple (CFM), a company-wide calculation of financial performance, which examines the premium that can potentially be achieved by improving operations or perceptions of the company. My recent doctoral dissertation prepared for the University of South Florida, Muma College of Business focused on linking a series of descriptive corporate attributes to predict the CFM.

Utilizing the CoreBrand Index® (CBI), which is a quantitative research survey that examines intangible attributes of 800 companies and has been fielded consistently every year since 1990, the study tested a new intangible trait, culture of innovation (COI).

As well as identifying a culture of innovation as being a robust new predictor of CFM, the study also found:

  • Overall reputation was a strong long-term predictor of a company’s CFM
  • Investment potential was a crucial short-term predictor of CFM
  • Perception of management was a weaker but still positive predictor of CFM
  • Culture of innovation was now found to be the strongest predictor of CFM
  • When culture of innovation was combined with the historical attributes, the predictability of the CFM improved significantly.

Each of the attributes CoreBrand tracks contribute to a company’s brand strength and the CFM. The historical attributes, when combined without the culture of innovation, will correctly predict the CFM 64 percent of the time. When the culture of innovation attribute was combined with all historical attributes the predictive power increased significantly from 64 percent to 77 percent.

The need for a solution for measuring, valuing, and managing intangible assets is indisputable. With intangible assets growing exponentially as a component of enterprise value, it is unproductive to allow them to go unmanaged. The alternative to moving forward is for intangible assets to remain unmanaged and unaccounted for except at the time the company is sold. Ultimately, this work is leading to a Theory of Intangible Capital, which will help make intangibles more tangible and will help senior executives better measure, value, and manage their intangible assets.


The CFM is determined by dividing the stock price per share by the cash flow per share, which provides a calculation that reflects the value of both the cash flow and market capitalization. Utilizing the cash flow multiple allows for apples-to-apples comparisons between different sized companies and identifies the premium that an investor pays for a specific stock given its level of cash flow. For this study, CFM is a better measurement instrument than, for example, PE ratio, because cash flow is often more indicative of business performance while earnings can frequently be negative based on accounting adjustments. CFM was the dependent variable throughout the research study.

CBI quantitative research measures an audience of impartial observers and evaluates their familiarity with and favorability toward attributes of specific corporations. The target audience of impartial observers is made up of both high profile consumers and business decision makers. CBI measures have been historically utilized to identify the strengthof the corporate brand and ultimately its financial impact on the company. For this research study, the author verified the role of each of the existing attributes in influencing market capitalization. Specifically, the effects of three historical attributes, overall reputation, perceptions of management, and investment potential, were examined for their impact on the cash flow multiple. The predictive effect of a new CBI attribute, culture of innovation, on the dependent variable cash flow multiple, was subsequently examined. Finally, the effect of the combined attributes on market capitalization was investigated as identified by the result of the cash flow multiple as the dependent variable.

A culture of innovation is defined as the perception of a company that prioritizes the advancement of new ideas that create value across all operations. The word perception in this context is crucial because it represents the views held by these impartial observers, and may not be the actual innovation that exists in these companies. However, the perceptions, when aggregated across many interviews, offer a consistent snapshot of companies from the public perspective. When examined longitudinally, they become a reliable tool for evaluating the effectiveness of business strategy and the resulting financial impact on the cash flow multiple.

Where to Find Out More

The author welcomes questions or inquiries. For more information please contact: James R. Gregory, by cell phone 203-979-7914 or email

  • About the Author:Dr. James Gregory

    Dr. James  Gregory

    Dr. James R. Gregory is a leading expert on measuring the strength of intangible assets and the resulting impact on corporate financial performance. He is chairman emeritus of Tenet Partners, where he…

    Full Bio | More from Dr. James Gregory


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