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Performance Measurement: An Investor's Perspective

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  • Lee, Charles M. C.

    (Stanford University)

Abstract

This article discusses the role of GAAP accounting from an investor's perspective. For all its flaws, a historical-based system of accounting is vital to the investment community, and I believe moves toward fair value accounting should proceed with great caution. Framing the discussion in terms of valuation theory, I argue that investors are typically more interested in assessing the present value of residual income than the value of assets-in-place. I also provide examples of how historical accounting numbers can be (and are being) used by professional investors. A simple residual income framework succinctly captures the essence of value investing. In fact, what academics have learned about fundamental investing in recent years dovetails nicely with the strategies used by such legendary investors as Ben Graham, Warren Buffett, and Joel Greenblatt.

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  • Lee, Charles M. C., 2014. "Performance Measurement: An Investor's Perspective," Research Papers 3065, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3065
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    Cited by:

    1. Jiang, Fuwei & Qi, Xinlin & Tang, Guohao, 2018. "Q-theory, mispricing, and profitability premium: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 87(C), pages 135-149.
    2. Basu Sudipta & Waymire Gregory B., 2019. "Historical Cost and Conservatism Are Joint Adaptations That Help Identify Opportunity Cost," Accounting, Economics, and Law: A Convivium, De Gruyter, vol. 9(1), pages 1-13, March.

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