The relationship between the accounting and the internal rate of return measures: a review and an analysis

Abstract

This paper provides a set of analytical procedures that permits a transformation between accounting data and economic measures of profitability. The error term prevailing, is analyzed and an approximation of it is derived for a multi-period time horizon. This approximation enables us to conclude that there may be some circumstances in which procedures designed to calculate ex-post values for the Internal Rate of Return (IRR), from a time series of periodical Accounting Rates of Return (ARRs), can have some operational significance.