A Note on Estimating the Internal Rate of Return From Published Financial Statements

Estimation of Internal Rate of Return Under Nonsteady Conditions

“…17 There is no way to directly evaluate the validity of the estimated parameters because the true values are not known. However, like in Ijiri (1980), Salamon (1982), Steele (1986), Gordon and Hamer (1988) and Kelly and Tippett (1991) empirical results are presented here to illustrate how the model may be applied and how the results could be interpreted. Furthermore, some of the obvious unsuccessful cases are separately evaluated in detail to find out why the method does not always work.…”

Further Notes on Estimating Economic Returns From Published Accounting Statements

“…The early literature on this issue, e.g., Harcourt (1965), Solomon (1966), Livingston and Salamon (1970), Stauffer (1971) and Fisher and McGowan (1983) draws such dismal conclusions on the perils of this endeavour as to virtually undermine its intellectual credentials. However, due to the insights of Kay (1976), Peasnell (1982), Kay and Meyer (1986), Steele (1986)and Brief and Lawson (1991) scholars are now less pessimistic about the conditions under which accounting measures can be used for valid economic analysis. The early literature investigating the relationship between ARR And IRR modelled the problem of a firm investing in individual projects and a mix of projects under alternative assumptions about depreciation policy and growth.…”

Approximate Error In Using Accounting Rates of Return to Estimate Economic Returns

“…The error in using accounting rates of return to estimate the economic return was discussed by Kay (1978), Wright (1978), Stark (1982), Peasnell(l982) and Steele (1986). The error term was shown to depend on the ratios of book value to economic value at the beginning and end of the time period.…”

“…Another line of research is based on work by Kay (1976) who showed that if a firm's book values at the beginning and at the end of a multiperiod time horizon were equal to economic values, it would be possible to derive the economic return from the sequence of accounting rates of return. The error in using accounting rates of return to estimate the economic return was discussed by Kay (1978), Wright (1978), Stark (1982), Peasnell(l982) and Steele (1986). The error term was shown to depend on the ratios of book value to economic value at the beginning and end of the time period.…”

“…This paper follows the second line of inquiry into the relationship between the accounting rate of return and the economic rate of return. Extending the work of Peasnell(l982) and Steele (1986), the error term is simplified and an approximation of the error is derived. The approximation is then used to simulate the error.…”