Evaluating q as an Alternative to the Rate of Return in Measuring Profitability

Henry B McFarland

The Review of Economics and Statistics, 1988, vol. 70, issue 4, 614-22

Abstract: The ratio of a firm's market value to its replace ment cost, q, is often used to measure firms' profitability. The use of q is increasin g in large part because of the growing realization that errors in evaluating firms' capital assets may cause errors in estimates of the accounting rate of return, r. The same objection, however, applies t o q. This paper reports the results of Monte Carlo experiments designed to determine whether q is superior to r. Errors in both q and r are large and potentially serious, but do not render either measure useless. Copyright 1988 by MIT Press.

Date: 1988
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