Evidence on the Usefulness of Capital Expenditures as an Alternative Measure of Depreciation

Dennis Chambers, Ross Jennings and Robert B. Thompson
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Dennis Chambers: The University of Illinois at Champaign-Urbana
Ross Jennings: The University of Texas at Austin
Robert B. Thompson: Virginia Commonwealth University

Review of Accounting Studies, 1999, vol. 4, issue 3, No 4, 169-195

Abstract: Abstract Investment professionals often suggest that accounting earnings is a more useful indicator of share value if adjusted by substituting current capital expenditures for reported depreciation. We investigate the usefulness of this alternative depreciation measure by comparing the ability of reported earnings and adjusted earnings to explain the cross-sectional distribution of stock prices for a large sample of manufacturing firms. We find that adjusted earnings explains a much smaller fraction of the variation in share prices than earnings based on reported depreciation, and provide evidence on the reasons for this difference.

Keywords: capital expenditures; depreciation (search for similar items in EconPapers)
Date: 1999
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DOI: 10.1023/A:1009673832445

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