Simple rate of return

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Simple rate of return

The return from investments figured by dividing income plus capital gains by the amount of capital invested. The effect of compounding is not taken into account.

Simple Rate of Return

An estimate of the return on an investment. It is calculated simply by finding the investment's profit before taxes and interest expenses. The simple rate of return is easy to calculate but is not always accurate because it considers the investment's profit rather than cash flow. It also does not take into account the effects of compounding. It is also called the accounting rate of return or the book value method.

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4 WHY ARE ACCOUNTING RETURNS RELATED TO EXECUTIVE COMPENSATION?

How Well Does Agency Theory Explain Executive Compensation?

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.

Thinking: is there one single perfect indicator that a firm can use to measure its performance?

Penman (2001) examined the relationship between interest rates and accounting returns and growth.

The Impact of High Inflation on Stock Market Returns in Pakistan

(2005) also propose that accounting returns and market measures represent two distinct dimensions of firm performance.

The relationship between accounting and market measures of firm financial performance: how strong is it?

In their paper the author found marginal evidence that accounting returns cause stock returns.

Accounting and economic rates of return: a dynamic econometric investigation

But short-term profit measures and accounting returns often do not do that.

Four options for measuring value creation: strategies for managers to avoid potential flaws in accounting measures of performance

The evidence of volatile performance was less complete, but there was a strong indication that CEO narcissism was associated with large annual fluctuations in accounting returns (ROA)."

It's All About Me: Narcissistic CEOs and Their Effects on Company Strategy and Performance

Letsinger noted that all syndicates currently have to file annual accounting returns. She described this as the first step toward converting to U.K.

End of a tradition: Lloyd's plan to move to U.K. GAAP and then to International Accounting Standards promises to bring transparency to a traditional market that is now dominated by corporate interests

The pair-wise correlations in Table III suggest that firms with committee insiders have lower stock and accounting returns, more concentrated ownership structures, and pay their CEOs a lower salary.

Further evidence on compensation committee composition as a determinant of CEO compensation