The Accountant in a Golden Age

Harcourt, G. C.

doi:10.1093/oxfordjournals.oep.a040979

Cited by 109 publications

(48 citation statements)

References 0 publications

Supporting

Mentioning

Contrasting

Unclassified

Order By: Relevance

“…Some authors such as Harcourt (1965) and Fisher and McGowan (1983) argue strongly against the use of accounting ratios as proxies for economic profitability.1O It should be recoguized, however, that data on value-based measures of performance for a large number of companies and over a long time period were not available until recently. This might explain why past research has traditionally relied on accounting measures of performance.…”

Section: Performance Measuresmentioning

confidence: 99%

“…They are also adopted increasingly by companies to examine whether their strategies create value for their shareholders. 10 For instance, Harcourt (1965) concludes that 'the accountant's rate of profit is greatly influenced by irrelevant factors, even under ideal conditions'. Similarly, Fisher and McGowan (1983) view that 'there is no way in which one can look at accounting rates of return and infer anything about relative economic profitability ... '.…”

Section: Performance Measuresmentioning

confidence: 99%

See 1 more Smart Citation

Is performance driven by industry‐or firm‐specific factors? A new look at the evidence

Hawawini

Subramanian

Verdin

2002

Strategic Management Journal

580

428

View full text Add to dashboard Cite

The authors acknowledge financial support from REL Consultants (INSEAD), Belgian Prime Minister's Fund for Scientific Research and Solvay Doctoral Fellowship. We thank Martina Vandebroek and Tom Vinaimont for suggestions on statistics issues. We also thank Piet Sercu for comments on an earlier draft. AbstractIn this study we revisit the question of whether firms' performance (usually measured as return on assets or ROA) is driven primarily by industry-or firm-specific factors by extending past studies in two major ways. First, we examine if the findings of past research can be generalized across all firms in an industry or whether it depends on a particular class of firms within the same industry. Second, in a departure from past research, we use value-based measures of performance (economic profit or residual income and market-to-book value) instead of accounting ratios. We also use a new data set and a different statistical approach for testing the significance of the independent effects. Our study uncovers an important phenomenon that may in large part be responsible for the strong firm-effect reported in past studies. We show that a significant proportion of the absolute estimates of the variance of finn-specific factors in our study is due to the presence of a few exceptional firms in an industry: the two firms that outperform their industry and the two that underperform in comparison to the rest. In other words, only for a few dominant value creators (leaders) and destroyers (losers) do firm-specific assets matter more than industry factors. For most firms, i.e. for those that are not notable leaders or losers in their industry, the industry effect turns out to be more important for performance than firm-specific factors. A possible explanation of this phenomenon is that superior (or poor) management leads to superior (or poor) firm performance irrespective of industry structure, which matters only for firms "stuck in the middle", i.e. for firms with average managerial capabilities and performance. We also show that this phenomenon does not depend on the metrics used to measure performance.

show abstract

Section: Performance Measuresmentioning

confidence: 99%

Section: Performance Measuresmentioning

confidence: 99%

Is performance driven by industry‐or firm‐specific factors? A new look at the evidence

Hawawini

Subramanian

Verdin

2002

Strategic Management Journal

580

428

View full text Add to dashboard Cite

show abstract

“…This interesting result is in sharp contrast with the accounting literature on economic rate of return, according to which accounting rates of return do not provide any information about a project's or firm's economic profitability (e.g. Harcourt 1965, Solomon 1966, Livingstone and Salamon 1970, Gordon 1974, Kay 1976, Fisher and McGowan 1983, Luckett 1984, Salamon 1985, Kay and Mayer 1986, Gordon and Stark 1989, Whittington 1988, Feenstra and Wang 2000, Stark 2004. See also Magni 2009a, 2011c, Magni and Peasnell 2012, 2015.…”

Section: The Average Return On Asset (Aroa)mentioning

confidence: 66%

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Magni

2016

Journal of Mathematical Economics

View full text Add to dashboard Cite

Abstract. This paper shows that the notion of rate of return is best understood through the lens of the average-internal-rate-of-return (AIRR) model, first introduced in Magni (2010a). It is an NPVconsistent approach based on a coherent definition of rate of return and on the notion of Chisini mean, it is capable of solving the conundrums originated by the rate-of-return notion and represents a unifying theoretical paradigm under which every existing measure of wealth creation can be subsumed. We show that a rate of return is underdetermined by the project's cash-flow stream; in particular, a unique return function (not a unique rate of return) exists for every project which maps depreciation classes into rates of return. The various shapes a rate of return can take on (internal rate of return, average accounting rate of return, modified internal rate of return etc.) derive from the (implicit or explicit) selection of different depreciation patterns. To single out the appropriate rate of return for a project, auxiliary assumptions are needed regarding the project's capital depreciation. This involves value judgment. On one side, this finding opens terrain for a capital valuation theory yet to be developed; on the other side, it triggers the creation of a toolkit of domainspecific and purpose-specific metrics that can be used, jointly or in isolation, for analyzing the economic profitability of a given project. We also show that the AIRR perspective has a high explanatory power that enables connecting seemingly unrelated notions and linking various disciplines such as economics, finance, and accounting. Some guidelines for practitioners are also provided.

show abstract

“…Indeed, if ROCE were a totally reliable measure of IRR there would be little reason for considering AVIE, since ROCE would be sufficient for most purposes. However, accountants and economists have long been aware of ROCE's deficiencies as an expost measure of IRR (Harcourt, 1965;Solomon, 1966;Stauffer, 1971;Fisher and McGowan 1983;Brief, 1986). Indeed, the case Kay and Davis (1 990a) advance for AVIE in preference to ROCE cites examples of where accounting measurement methods can result in ROCE yielding misleading comparisons between firms in different industries.…”

Section: The Return Measuresmentioning

confidence: 99%

Commonalities Between Added Value Ratios and Traditional Return on Capital Employed

Kwong

Munro

Peasnell

1995

Accounting and Business Research

View full text Add to dashboard Cite

This paper provides an empirical comparison between two versions of a new accounting ratio devised by Davis (1990a, 1990b) and Kay (1993) and the traditional capital employed (ROCE) ratio. The new measures, 'added value on inputs employed' (AVIE) and 'added value on net output' (AVNO), are both based on a version of residual income they label 'added value', but differ in choice of scaling variable. Empirical evidence is provided in this paper on AVlE and AVNO, including cross-sectional patterns, distributional properties, sensitivity to alternative specifications, and rank-ordering and serial-correlation performance compared with ROCE. AVIE and AVNO differ markedly from ROCE in terms of absolute levels and account for at most half of the latter's cross-sectional variation. On the other hand, the results indicate that both the rank orderings and rank predictions of the different measures are very similar. The distributional properties of the added value ratios are sensitive to choice of scaling variable, suggesting that considerable care has to be exercised in drawing conclusions from the absolute rankings of these measures. The new added value ratios provide signals about firm rankings that differ only to a limited degree from those rendered by the traditional ROCE ratio.

show abstract

The Accountant in a Golden Age

Cited by 109 publications

References 0 publications

Is performance driven by industry‐or firm‐specific factors? A new look at the evidence

Is performance driven by industry‐or firm‐specific factors? A new look at the evidence

Capital depreciation and the underdetermination of rate of return: A unifying perspective

Commonalities Between Added Value Ratios and Traditional Return on Capital Employed

Contact Info

Product

Resources

About