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|
|Date of revision:|
|Contact details of provider:|| Postal: Badia Fiesolana, Via dei Roccettini, 9, 50014 San Domenico di Fiesole (FI) Italy|
Web page: http://www.eui.eu/ECO/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Salamon, Gerald L, 1985. "Accounting Rates of Return," American Economic Review, American Economic Association, vol. 75(3), pages 495-504, June.
- 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.
- Martin, Stephen, 1988. "The measurement of profitability and the diagnosis of market power," International Journal of Industrial Organization, Elsevier, vol. 6(3), pages 301-321.
- Fisher, Franklin M & McGowan, John J, 1983. "On the Misuse of Accounting Rates of Return to Infer Monopoly Profits," American Economic Review, American Economic Association, vol. 73(1), pages 82-97, March.
- repec:dgr:rugsom:00e42 is not listed on IDEAS
- Verma, Kiran, 1990. "Effects of accounting techniques on the study of market power," International Journal of Industrial Organization, Elsevier, vol. 8(4), pages 587-598, December.
- Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
- 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.
- Feenstra, D.W. & Wang, H., 2000. "Economic and accounting rates of return," Research Report 00E42, University of Groningen, Research Institute SOM (Systems, Organisations and Management).
- Fisher, Franklin M, 1984. "The Misuse of Accounting Rates of Return: Reply," American Economic Review, American Economic Association, vol. 74(3), pages 509-17, June.
When requesting a correction, please mention this item's handle: RePEc:eui:euiwps:eco2006/7. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Anne Banks)
If references are entirely missing, you can add them using this form.