Accounting and Economic Rates of Return: a Dynamic Econometric Investigation
Many studies have questioned empirical utilization of accounting data as internal rates of return would be more consistent with the relevant economic concept. The paper investigates the dynamic relationships between different measures of accounting rates of return (ARRs) and different approximations for the internal rates of returns (IRRs). In contrast with the prevailing case-study investigations, one considers a panel for quoted Brazilian firms in the manufacturing industry along the 1988-3/2003-2 period. Granger causality tests are considered and even though the results are not completely clear cut, some discernible uni-directional patterns emerge. In particular, there seems to be informational content between economic and accounting rates of return, between ROA (Net Profits/Total Assets) and PM (Gross Profits/ Operational Income), and internal rates of return. This seems to indicate that there is some validity in using accounting rates of return in certain economic studies.
|Date of creation:||2006|
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- Salamon, Gerald L., 1988. "On the validity of accounting rates of return in cross-sectional analysis: Theory, evidence, and implications," Journal of Accounting and Public Policy, Elsevier, vol. 7(4), pages 267-292.
- Salamon, Gerald L, 1989. "Accounting Rates of Return: Reply," American Economic Review, American Economic Association, vol. 79(1), pages 290-93, March.
- Christopher Taylor, 1999. "The Cash Recovery Method of Calculating Profitability: An Application to Pharmaceutical Firms," Review of Industrial Organization, Springer, vol. 14(2), pages 135-146, March.
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