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Alternative measures of rates of return: Some empirical evidence
Author(s) -
Bosch J. C.
Publication year - 1989
Publication title -
managerial and decision economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.288
H-Index - 51
eISSN - 1099-1468
pISSN - 0143-6570
DOI - 10.1002/mde.4090100306
Subject(s) - proxy (statistics) , rate of return , profitability index , cash flow , economics , internal rate of return , econometrics , accounting , time weighted return , empirical evidence , profit (economics) , profit rate , return on capital employed , financial economics , investment performance , return on investment , macroeconomics , microeconomics , finance , statistics , mathematics , philosophy , capital formation , epistemology , production (economics) , financial capital
Firm profitability is measured in most cases by an accounting rather than by the theoretically superior economic (or internal) rate of return. This paper explores the relationship between accounting and internal rates of return using COMPUSTAT data for 1013 large industrial firms over a 20‐year period. The research was motivated by the controversy ongoing between scholars concerning the validity of the accounting rate of return as a proxy for economic profit. The method used in this paper is different from previous research in that cash flow profiles are estimated instead of being assumed. The results, while generally supporting the contention that accounting rates of return are poor proxies for underlying economic rates of return, also provide evidence that the distortions are not so great as to render them useless for performance measurement and managerial decision‐making purposes.