Measuring innovation capability and its effects on financial performance using companies’ annual reports

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Companies try to survive and gain competitive advantage by leveraging their innovation capabilities, which need to be more accurately measured through company annual reports to provide valuable insights for investors and stakeholders. The study aims to analyze how innovation capability can be understood using innovative textual analysis based on linguistic cues to assess the level of a company’s innovation capability using secondary data from companies’ annual reports and then validated by empirical tests. The study surveyed 30 companies listed on the Indonesian Stock Exchange from various sectors and industries and applied panel data regression with a five-year time series (2018–2022). Innovation capability was an independent variable, measured by textual analysis approach, and return on assets (ROA) and return on equity (ROE) were dependent variables. Descriptive statistics showed no significant differences in innovation capability, ROA, and ROE across sectors. Correlation analysis revealed no significant association between company age and these variables. Panel data regression confirmed that innovation capability positively influences ROA (p-value 0.078) and ROE (p-value 0.035). Notably, the impact of innovation capability on ROA increased during and after the COVID-19 pandemic, highlighting its growing importance in financial performance during challenging times.

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    • Table 1. Scoring scale for innovation capability
    • Table 2. Example of scoring innovation capability
    • Table 3. Company profile
    • Table 4. Company age distribution
    • Table 5. Descriptive statistics of research variables
    • Table 6. Panel regression results of innovation capability on ROA using random effect model
    • Table 7. Panel regression results of innovation capability on ROE using random effect model
    • Table 8. Comparison of panel regression results of innovation capability on ROA with pandemic
    • Table 9. Comparison of innovation capability panel regression results on ROE with the pandemic
    • Table A1. Sample corporations
    • Conceptualization
      M. Elfan Kaukab
    • Data curation
      M. Elfan Kaukab
    • Formal Analysis
      M. Elfan Kaukab
    • Funding acquisition
      M. Elfan Kaukab
    • Investigation
      M. Elfan Kaukab
    • Methodology
      M. Elfan Kaukab
    • Project administration
      M. Elfan Kaukab
    • Resources
      M. Elfan Kaukab
    • Software
      M. Elfan Kaukab
    • Supervision
      M. Elfan Kaukab
    • Validation
      M. Elfan Kaukab
    • Visualization
      M. Elfan Kaukab
    • Writing – original draft
      M. Elfan Kaukab
    • Writing – review & editing
      M. Elfan Kaukab
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