Evaluating models of the relationship between accounting profitability measures and internal rate of return

Abstract

Researchers have investigated the relationship between the internal rate of return (IRR) and accounting-based profitability measures using analytical and indirect empirical methodologies. The current study employs computer simulation to complement the other two methodologies and corroborate their results. The results indicate that the accounting rate of return (ARR) and the conditional estimate of internal rate of return (CIRR) are strongly associated with IRR; however, the length of the estimation period and formulation used for CIRR appear to affect its relationship to IRR. ARR's relationship to IRR appears to be unaffected by the length of the estimation period.