Abstract
Utility company managers (and most business people) are often surprised to learn that accounting income and rate-of-return measures have little economic significance and do not offer much insight into the profitability of a venture or firm. Why the serious shortcomings of the accounting earnings measure are not more widely recognized is quite puzzling in view of the fact that the academic literature has been dealing with this problem for at least 25 years.1 So significant are the errors associated with the accounting rate of return (ARR), according to some researchers, that it “provide[s] almost no information about the [true] economic rates of return” of American corporations (Fisher and McGowan 1983, 82). Nonetheless, the ARR continues to be widely followed, and, in the regulatory context, forms the basis for ratemaking, a role for which it was certainly never intended and for which it is poorly suited (Awerbuch 1986, 20–21).
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Anthony, Robert N. 1986. “Accounting Rates of Return.”American Economic Review 76 (1): 244–246.
Anton, Hector A. 1956. “Depreciation, Cost Allocation and Investment Decisions.” Accounting Research (April): 117–134.
Awerbuch, Shimon. 1985. “Return on Equity Ratemaking: Biased Earnings and Market-to-Book Ratios Due to Obsolescence and Excess Capacity.” In The Impact of Deregulation and Market Forces on Public Utilities, edited by Patrick V. Mann and Harry M. Trebing. East Lansing, MI: Michigan State University.
Awerbuch, Shimon. 1986. “Accounting Traditions and the Determination of Regulated Return.” Presented at the Advanced Workshop in Regulation and Public Utility Economics, Rutgers University.
Awerbuch, Shimon. 1988. “Accounting Rate of Return.” American Economic Review (June).
Awerbuch, Shimon, and Russel Boisjoly. 1988. “The Use of Accounting Rates of Return in Regulation.” Working Paper, College of Management Science, University of Lowell.
Beaver, William H. 1981. Financial Reporting: An Accounting Revolution. Englewood Cliffs: Prentice Hall.
Beaver, William H., and Landsman, W.R. 1983. Incremental Information Content of Statement 33 Disclosures. Stamford, CT: FASB (November).
Belkaoui, Ahmed. 1981. Accounting Theory. New York: Harcourt.
Benston, George J., and Krasney, M.A 1978. “The Economic Consequence of Financial Accounting Statements.” In Economic Consequence of Financial Accounting Standards. Stamford, CT: FASB (July): 161–252.
Bierman, Harold. 1974. “Regulation, Implied Revenue Requirements and Method of Depreciation.” Accounting Review (July).
Bidwell, Miles O. 1985. Direct Testimony Before the N.Y. State P.S.C. in the Matter of the Niagra Mohawk Power Corp. Case No. 29069/70 (August).
Bower, Richard S. 1985. “The Capital Recovery Question.” Resources and Energy 7:7–42.
Brealey, Richard, and S.C. Myers. 1984. Principle of Corporate Finance. 2d ed. New York: McGraw Hill.
Brief, Richard P. (ed.) 1987. Estimating the Economic Rate of Return From Accounting Data. New York: Garland Press.
Canning, J.B. 1929. The Economics and Accountancy. New York: Roland.
Crew, Michael A., and Nancy P. Karen. 1984. “Proposal for Reforming Depreciation Schedules in the Regulated Telecommunications Industry: The Case of New York Telephone.” Advanced Workshop in Public Utility Regulation and Economics, Rutgers University, Newark, NJ.
Crew, Michael A., and Paul R. Kleindorfer. 1987. The Economics of Public Utility Regulation. London, Macmillan Press.
Edwards, Edgar O., and P.W. Bell. 1961. Theory and Measurement of Business Income. Berkley: University of California Press.
Financial Accounting Standards Board (FASB). 1978. “Statement of Financial Accounting Concept No. 1: Objectives of Financial Reporting by Business Enterprises.” Stamford, CT: FASB (November).
Fisher, Franklin M., and J.J. McGowan. 1983. “On the Misuse of Accounting Rates of Return to Infer Monopoly Profits.” American Economic Review 73 (No. 1, March): 82–97.
Fisher, Irving. 1906. The Nature of Capital and Income. New York: MacMillan.
Fisher, J.C., and Pry, R.H. 1971. “A Simple Substitution Model of Technological Change.” Technological Forecasting and Social Change: 75–88.
Gordon, M.J. 1967. “An Economist’s View of Profit Measurement.” In Profits in the Modern Economy, edited by H.W. Stevenson and J.R. Nelson. Minnesota: University of Minnesota Press.
Griffith, Mark, and Terry Robinson. 1985. “Economic Value and Capital Recovery: A Regulatory Economic Model.” Presented at the Avanced Workshop in Regulation and Public Utility Economics, Rutgers University, Newark, N.J.
Harcourt, G.C. 1965. “The Accountant in a Golden Age.” Oxford Economic Papers, Series 2, 17 (March): 66–80.
Hicks, John R. 1946. Value and Capital. 2d ed. London: Oxford University Press.
Hicks, John R. 1969. “The Measurement of Capital.” Proceedings of the 37th Session, London, Bulletin of the International Statistical Institute 43:253–263; Reprinted in Brief (1987).
Hicks, John R. 1979. “The Concept of Income in Relation to Taxation and to Business Management.” Proceedings of the 35th Congress of the International Institute of Public Finance; Reprinted in Brief (1987).
Hotelling, Harold. 1925. “A General Mathematical Theory of Depreciation.” Journal of the American Statistical Association 20 (September): 340–353.
Ijiri, Yuji. 1980. “Recovery Rate and Cash Flow Accounting.” Financial Executive (March): 54–56.
Kay, J.A. 1976. “Accountants, Too, Could be Happy in a Golden Age: The Accountants Rate of Profit and the Integral Rate of Return.” Oxford Economic Papers 28 (November): 447–460.
Kolbe, Lawrence. 1985. “How Can Regulated Rates—and Companies—Survive Competition?” Public Utilities Fortnightly (April).
Kolbe, A Lawrence, James A. Read, Jr., and G. Hall. 1984. The Cost of Capital. Cambridge, MA- MIT Press.
Kraus, A., and R.J. Huefner. 1972. “Cash-Flow Pattern and the Choice of a Depreciation Method.” Bell Journal of Economics and Management Science 3 (Spring): 316–34.
Lindahl, Erik. 1939. Studies in the Theory of Money and Capital. London: Allen and Unwin.
Luckett, Peter F. 1984. “ARR vs. IRR: A Review and Analysis.” Journal of Business Finance and Accounting 2 (No. 2, Summer): 213–231.
Melicher, Ronald W. 1987. “The Unbundling of Traditional Measures of Rate of Return by Regulated and Unregulated Services.” In New Regulatory and Management Strategies in a Changing Market Environment, edited by H. Trebing. East Lansing, MI: Institute for Public Utilities, Michigan State University.
Myers, S., L. Kolbe, and M. Tye. “Inflation and Rate of Return Regulation.” Research in Transportation Economics, Vol. 2.
Myers, Stewart C. 1972. “The Application of Finance Theory to Public Utility Rate Cases.” Bell Journal of Economics 3 (Spring): 59–97.
Navarro, Peter, B.C. Peterson, and T.R. Stauffer, “A Critical Comparison of Utility-Type Ratemaking Methodologies in Oil Pipeline Regulation.” Bell Journal of Economics 12 (No. 2, Autumn): 392–412.
Salamon, Gerald, L. 1985. “Accounting Rates of Return.” American Economic Review 75 (No. 3, June): 495–504.
Sherman, Roger. 1972. “The Rate of Return Regulated Public Utility Firm is Schizophrenic.” Applied Economics 4 (March): 23–31.
Solomon, Ezra. 1970. “Alternative Rate of Return Concepts and Their Implications for Utility Regulation.” Bell Journal of Economics and Management Science 1 (No. 1, Spring): 65–81.
Solomons, David. 1986. Making Accounting Policy, New York: Oxford University Press.
Stauffer, Thomas R. 1980. The Measurement of Corporate Rates of Return. New York: Garland Press.
Sterling, Robert R. 1970. Theory of the Measurement of Enterprise Income. Lawrence: University of Kansas.
Suelflow, James E. 1973. Public Utility Accounting. East Lansing, MI: Institute of Public Utilities, Michigan State University.
Treynor, Jack L. 1972. “Discussion.” Empirical Research in Accounting: Selected Studies. Graduate School of Business, University of Chicago, 42–44.
Winn, Darryl. 1978. “The Potential Effect of Alternative Accounting Measures on Public Policy and Resource Allocation.” In Economic Consequences of Financial Accounting Standards, FASB Research Report, Stamford, CT (July).
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 1989 Kluwer Academic Publishers
About this chapter
Cite this chapter
Awerbuch, S. (1989). Efficient Income Measures and the Partially Regulated Firm. In: Crew, M.A. (eds) Deregulation and Diversification of Utilities. Topics in Regulatory Economics and Policy, vol 3. Springer, Boston, MA. https://doi.org/10.1007/978-1-4684-6897-7_5
Download citation
DOI: https://doi.org/10.1007/978-1-4684-6897-7_5
Publisher Name: Springer, Boston, MA
Print ISBN: 978-1-4684-6899-1
Online ISBN: 978-1-4684-6897-7
eBook Packages: Springer Book Archive