The Measurement Approach To Decision Usefulness
The Measurement Approach To Decision Usefulness
The Measurement Approach To Decision Usefulness
6-1
Copyright © 2009 by Pearson Education Canada
Chapter 6
The Measurement Approach to Decision Usefulness
6-2
Copyright © 2009 by Pearson Education Canada
What is the Measurement Approach?
» Continued
u(x)
x
loss gain
• Answer 1: yes
– Non-stationarity of beta
• Answer 2: no
– Behavioural finance
• Share returns driven by investor overconfidence, not by
beta
• Conclusion
– Beta not dead, but other risk variables (e.g., book-to-
market, firm size) also explain share returns
– This suggests increased role of reporting on risk
» Continued
» Continued
• What is it?
– Expresses value of firm in terms of accounting variables
• Firm value = net assets ± present value of future
abnormal earnings
» Continued
» Continued
• Use CAPM
– E(Rjt) = Rf(1 - βj) + βjE(RMt)
• E(Rjt) = cost of capital
• E(RMt): suggest use market risk premium:
– 3 to 4% in recent years
– E(RMt) = Rf + 3 or 4%
» Continued
» Continued
» Continued
» Continued
» Continued