Solving the Value Metrics Puzzle

42 Pages Posted: 10 Aug 2004

See all articles by Kees Cools

Kees Cools

Boston Consulting Group

Hans le Grand

Boston Consulting Group

Erik Meijer

University of Southern California; RAND Corporation

Tom Wansbeek

University of Groningen - Faculty of Economics and Business

Date Written: July 15, 2004

Abstract

On theoretical grounds, shareholder returns should be better explained by some version of residual income (operating profit minus a capital charge) than by a profit number solely. However, empirical evidence indicates the opposite. We first investigate whether this 'value metrics puzzle' may be due to the measurement problems met when quantifying the cost of capital. Our results suggest that these problems do indeed negatively affect the explanatory power of residual income. Secondly, after robustness handling the results further improve and we find strong evidence that 'residual income beats earnings'. A third finding is that the market-derived way of determining the cost of capital generally dominates the CAPM-based one.

Keywords: Performance measure selection, cost of capital, CAPM

JEL Classification: G30, G32, M40, M50

Suggested Citation

Cools, Kees and le Grand, Hans and Meijer, Erik and Wansbeek, Tom, Solving the Value Metrics Puzzle (July 15, 2004). Available at SSRN: https://ssrn.com/abstract=568423 or http://dx.doi.org/10.2139/ssrn.568423

Kees Cools (Contact Author)

Boston Consulting Group ( email )

J.F. Kennedylaan 100
3741 EH Baarn
Netherlands
+ 31 35 54 868 00 (Phone)

Hans Le Grand

Boston Consulting Group

J.F. Kennedylaan 100
3741 EH Baarn
Netherlands

Erik Meijer

University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

RAND Corporation ( email )

1776 Main Street
P.O. Box 2138
Santa Monica, CA 90407-2138
United States

Tom Wansbeek

University of Groningen - Faculty of Economics and Business ( email )

Postbus 72
9700 AB Groningen
Netherlands

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
262
Abstract Views
1,996
Rank
186,905
PlumX Metrics