Measurement Approach to Decision Usefulness
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…
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 hopingagainsthope 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 firmspecific 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) ‘nonstationary’ 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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