Accounting Rates Of Return As Proxies For The Economic Rate Of Return: An Empirical Investigation

Abstract

Accounting rates of return have been criticized by theoretical researchers as biased estimates of the economic rate of return.  If true, results of past industrial organization research utilizing accounting measures of profitability are called into question.  Using Tobin’s q to proxy for the economic rate of return, this study empirically investigates whether accounting rates of return are biased proxies for the economic rate of return.  The empirical results support the findings of theoretical research.