Accounting Based Risk Measurement: An Alternative to CAPM Derived Discount Factors

University of York Management School Working Paper No. 68

15 Pages Posted: 27 May 2012

See all articles by Steve Toms

Steve Toms

University of Leeds - Leeds University Business School (LUBS); University of Leeds - Division of Accounting and Finance

Date Written: May 26, 2012

Abstract

Discount factors have a long tradition of being computed using capital market inputs for the estimation of systematic risk. They are of increasing importance in financial accounting, including the valuation of goodwill and other intangibles. In view of the volatility of stock market returns and their inaccuracy and disjunction from the underlying cash flows of the firm, this paper proposes an alternative accounting based approach: accounting based risk measurement (ABRM). Alternatives to beta are computed from planning and budgeting metrics at firm level to produce consistent risk estimates factoring patterns of revenue and cost behaviour weighted according to their impact on the accounting rate of return. This approach is contrasted with the analysis and interpretation of asset betas in the corporate finance literature.

Keywords: Asset beta, CAPM, fixed cost, accounting rate of return

JEL Classification: G12, G31, M41

Suggested Citation

Toms, Steve, Accounting Based Risk Measurement: An Alternative to CAPM Derived Discount Factors (May 26, 2012). University of York Management School Working Paper No. 68. Available at SSRN: https://ssrn.com/abstract=2067193 or http://dx.doi.org/10.2139/ssrn.2067193

Steve Toms (Contact Author)

University of Leeds - Leeds University Business School (LUBS) ( email )

Leeds LS2 9JT
United Kingdom

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

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