Culp does not point out that Shimpi constructs his examples by using a firm's accounting return
on debt, equity, and ART capital, which casts doubt to the conclusion that ART capital reduces the firm's economic cost of capital.
I also include shareholder return and accounting return
on assets as control variables, since these measures indicate whether CEO pay is tied to firm performance.
A cursory reading of articles and books could lead you to believe that the notion of accounting return
on investment, or ROI (accounting income divided by accounting asset value), is valid for evaluating investment decisions.
Generally, commercial banking appears to be one of the least risky activities in financial services, as measured by the coefficient of variation of its accounting return
on equity (ROE) or its accounting return
on assets (ROA).
Fisher and McGowan (1983) and Benston (1985) have been extremely critical of empirical research that utilizes accounting rate of return claiming that accounting return
is highly flawed as a measure of economic return.
Given the inherent weaknesses of single measures of performance and in order to capture and probe different strategic objectives of foreign investors and the corresponding roles of IJVs, in this study, IJV performances is measured along two dimensions: accounting return
(ROI and ROA), and market growth (domestic sales and export growth).
CM's expected accounting return
on investment is 15 per cent, which is calculated as average profits after tax as a percentage of average investment over the life of the assets.
Prior research (Larcker, 1983) and executive surveys (Rich and Larson, 1984) indicate that most performance plan goals are based on earnings per share (EPS) growth and accounting return
on equity (ROE).
Hence, if firms choose the accounting performance measure based on efficient contracting then the choice will be a function of the correlation between the accounting return
and stock return of the firm.
The control-adjusted performance variables and operating variables all show increases pre- to post-block formation, but only the accounting return
variable is (marginally) significant.
A caveat is in order with respect to various accounting return
measures such as ROE, ROC, and ROA.
At managerial level, companies use summary measures of aggregate performance, using monetary terms such as profits, accounting returns
and market returns, but none of these is perfect on its own.