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Evidence on the Usefulness of Capital Expenditures as an Alternative Measure of Depreciation

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  • Dennis Chambers

    (The University of Illinois at Champaign-Urbana)

  • Ross Jennings

    (The University of Texas at Austin)

  • Robert B. Thompson

    (Virginia Commonwealth University)

Abstract

Investment professionals often suggest that accounting earnings is a more useful indicator of share value if adjusted by substituting current capital expenditures for reported depreciation. We investigate the usefulness of this alternative depreciation measure by comparing the ability of reported earnings and adjusted earnings to explain the cross-sectional distribution of stock prices for a large sample of manufacturing firms. We find that adjusted earnings explains a much smaller fraction of the variation in share prices than earnings based on reported depreciation, and provide evidence on the reasons for this difference.

Suggested Citation

  • Dennis Chambers & Ross Jennings & Robert B. Thompson, 1999. "Evidence on the Usefulness of Capital Expenditures as an Alternative Measure of Depreciation," Review of Accounting Studies, Springer, vol. 4(3), pages 169-195, December.
    • Handle: RePEc:spr:reaccs:v:4:y:1999:i:3:d:10.1023_a:1009673832445
    DOI: 10.1023/A:1009673832445
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    References listed on IDEAS

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    Cited by:

    1. Lisa Bryant, 2003. "Relative Value Relevance of the Successful Efforts and Full Cost Accounting Methods in the Oil and Gas Industry," Review of Accounting Studies, Springer, vol. 8(1), pages 5-28, March.

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