TITLE

Tobin's q and the Relation Between Accounting ROI and Economic Return

PUB. DATE
January 1995
SOURCE
Journal of Accounting, Auditing & Finance;Winter95, Vol. 10 Issue 1, p119
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The article focuses on the relation between accounting return on investment (ROI) and economic return. The relation between accounting data and economic reality is a subject of continuing debate in both economies and accounting literatures. One manifestation of this debate is the current controversy as to whether the accounting ROI corresponds to the economic rate of return. This issue is of critical importance, given the central role played by ROI, defined as net income total assets in a variety of economic venues, anti-trust cases, internal resources allocation, corporate restructuring decisions, managerial compensation schemes, valuation of closely held companies and performance measurement of strategic business units. However, the many well-known problems associated with using reported earnings to measure economic profits lend credence to the charge that accounting rates of return convey little information about economic rates of return and call into question the common practice of using ROI to measure business performance.
ACCESSION #
11762742

 

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