Accounting Measures of Business Performance and Tobin's q Theory

Abstract

In this paper, Tobin's q theory is applied to evaluate the informativeness of the traditional accounting measures of business performance and the measures derived from the cash recovery rate (CRR). The informativeness is defined in terms of the correlation of the performance measure and the internal rate of return implied in a ratio known as Tobin's q. The paper shows that the traditional ROI does weakly reflect the underlying profitability. The internal rate of return derived from the cash recovery rate approach, however, seems to be more informative than the ROI.

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