Discussion of “Conservatism, growth and return on investment”

Froystein Gjesdal ()
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Froystein Gjesdal: Norwegian School of Economics and Business Administration

Review of Accounting Studies, 2007, vol. 12, issue 2, No 10, 376 pages

Abstract: Abstract Providing data for the measurement of financial performance is a key objective of financial reporting. Rajan, Reichelstein, and Soliman (2007, Conservatism, growth and return on investment, Review of Accounting Studies, this issue) provide new insights into the well known biases involved in measuring return on investment (ROI) on the basis of accrual accounting. They analyze the relationships among ROIs, growth rates, accrual policies and cash flow profiles in a fairly general steadystate model (only the last parameter is severely restricted). New and interesting results outside steady-state are presented as well. In the empirical part of the paper Rajan et al. demonstrate that the biases involved are systematic and economically significant. Hence empiricists must pay attention (whatever their sample sizes). Hopefully this paper will generate renewed interest in the analytical aspects of accrual accounting.

Keywords: Measuring financial performance; Return on investment; D21; M21; M41 (search for similar items in EconPapers)
Date: 2007
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DOI: 10.1007/s11142-007-9037-0

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