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

Evidence on the Usefulness of Capital Expenditures as an Alternative Measure of Depreciation 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

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

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Publisher
Springer Journals
Copyright
Copyright © 1999 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1009673832445
Publisher site
See Article on Publisher Site

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.

Journal

Review of Accounting StudiesSpringer Journals

Published: Sep 30, 2004

References

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