# Measurement Approach to Decision Usefulness

1497 Words Mar 19th, 2014 6 Pages
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.

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.
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