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The measurement of the economic performance of the US Nonfinancial Corporate Business Sector 1946-1990: an application of the shareholder value creation concept

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  • Gerald Lawson

Abstract

This paper is based upon a juxtaposition of the cash flow-market value performance (alias SVC performance) and historic cost accounting (HC) performance of the US Nonfinancial Corporate Business sector 1946-90. It has two principal objectives: 1. To determine whether, judged on return and variability dimensions, the HC accounting model is an operationally acceptable surrogate for a multiperiod market-based accounting model. 2. To analyse the consequences of HC income-based distributions, i.e., corporate tax, interest and dividend payments based on conventionally-measured corporate income. Three principal conclusions are drawn: i. Notwithstanding their common cash flow component, HC performance indices are not reliable surrogates for SVC performance criteria. The former apparently do not accurately capture changes in corporate valuation and generally understate the variability of market-based returns. ii. The multiperiod HC income of a going concern characteristically overstates its coterminous multiperiod cash flows to a considerable degree. Contrary to common supposition, the former does not therefore constitute a 'normalized' or 'smoothed' version of a firm's 'primitive' cash flows in the sense that the cumulative (multiperiod) values of the two measures tend to converge. iii. As a consequence of ii, HC income and its near relation, taxable earnings, are dubious bases for measuring interest-paying, tax-paying and dividend-paying capacities. Corporate income-distribution decisions based on HC accruals-based profit measures frequently trigger external financing which may cause shareholder wealth losses and wealth transfers from shareholders to lenders. However, 'fiscal drag' appears to be the most serious consequence of HC accruals-based income distribution decisions.

Suggested Citation

  • Gerald Lawson, 1996. "The measurement of the economic performance of the US Nonfinancial Corporate Business Sector 1946-1990: an application of the shareholder value creation concept," European Accounting Review, Taylor & Francis Journals, vol. 5(4), pages 715-741.
    • Handle: RePEc:taf:euract:v:5:y:1996:i:4:p:715-741
    DOI: 10.1080/09638189600000044
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    1. Easton, Peter D. & Harris, Trevor S. & Ohlson, James A., 1992. "Aggregate accounting earnings can explain most of security returns : The case of long return intervals," Journal of Accounting and Economics, Elsevier, vol. 15(2-3), pages 119-142, August.
    2. Merton H. Miller & Franco Modigliani, 1961. "Dividend Policy, Growth, and the Valuation of Shares," The Journal of Business, University of Chicago Press, vol. 34, pages 411-411.
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    1. Edyta Mioduchowska-Jaroszewicz, 2021. "An Analysis of External Cash Flows of Capital Groups," European Research Studies Journal, European Research Studies Journal, vol. 0(Special 1), pages 325-340.

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