Measurement Approach to Decision Usefulness

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MEASUREMENT APPROACH TO DECISION USEFULNESS • (184) MEASUREMENT APPROACH: i. ii. iii. Accountants (not investors) “undertake a responsibility” To incorporate CURRENT VALUE ACCOUNTING directly in to the F/S Provided “reasonable (37) reliability” iv. v. a. b. As part of an “increased obligation” of the accounting profession “To assist investors to predict future performance and value” Performance = N.I. Value = share price vi. Via a “more informative information system” • QUALIFIERS i. ii. (185) “Beta is the only relevant risk measure according to the CAPM” “there is evidence that accounting variables … do a better job than beta in predicting share return” • RISK vs. RETURN i.…show more content…
People react much more strongly to losses than they do to gains. This produces a (189) disposition effect: “The investor holds onto losers and sells winners.” In effect, people will not ‘realize’ a loss; they will hold on to a losing company hoping-against-hope that the stock will somehow recover. Is this realistic? Consider Nortel. 4 VARIABLES TO CORRELATE WITH SHARE PRICE Alternatives to Beta • CAPM: (191) “beta is the sole firm-specific risk determinant of the expected return on that stock” • (192) “beta, and thus the CAPM, has little ability to explain stock returns” • Therefore, look for other variables that will explain EXPECTED RETURN (the dependent variable, the y axis) • Alternative independent variables (the factor for the x axis) i. ii. iii. Financial accounting ratios such as book / market ratio Segmentation of stock markets. “Firm size”: i.e. small cap, mid cap and large cap market segments Redefine beta: the beta of an individual stock will change over time so beta should also change. Therefore, the definition of beta should change from a (192) ‘stationary’ concept to a (193) ‘non-stationary’ concept. This creates an additional potential for (122) estimation risk. Change the definition (or ‘determinant’) of (111) Expected Return = E(R). This is the dependent variable, the y axis. This means different (25) FUTURE CASH FLOWS. (193) “a fundamental determinant of E(R mkt) is aggregate expected
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