The Measurement of Corporate Rates of Return: A Generalized Formation

Abstract

General conditions are derived under which accounting ratios, such as the conventionally defined accounting rate of return, deviate from the economic rate of return for a firm. Cash revenue streams of arbitrary time-shape, non-depreciable capital, and corporate income taxes are considered. The sign and magnitude of the bias in the accounting rate of return depend upon the depreciation schedule, the revenue timestream, the firm's growth rate, and its capital structure.