An evaluation of the accounting rate of return : evidence for Dutch quoted firms

Although the accounting rate of return (ARR) is traditionally regarded as an important
profitability measure in ratio analysis, there has been relatively little theoretical and
empirical analysis on its statistical properties and its intrinsic ability to explain market
returns. This paper provides an empirical examination of the distributional properties
and a time-series analysis of the ARR’s of listed Dutch companies for the years from
1978 to 1997. Furthermore we examine how the ARR is related to market return and
risk.
We investigate the distributional properties of the accounting rate of return. Our
study confirms prior international research which concludes that ARR follows a non-normal
distribution. Previous US and UK studies suggest that time series earnings or
ARR can be characterized by a random walk or a mean-reverting process. The time
series results of our sample are characterized by mean reversion. This paper extends
the empirical research on ARR by deriving a panel data analysis that yields more
reliable estimates. Researchers using US data found that the ARR was deficient as a
representation of market returns and was not related to systematic risk. We find the
opposite.

	00E55.pdf

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