Accounting-based Risk Measurement: An Alternative to Capital Asset Pricing Model Derived Discount Factors


  • Steven Toms

Steven Toms, Professor of Accounting, Leeds University Business School, Room 2.09, Maurice Keyworth Building, University of Leeds, Leeds LS2 9JT, United Kingdom. Tel: +44113 343 4456; email:


Discount factors have a long tradition of being computed using capital market inputs for the estimation of systematic risk. They are of increasing importance in financial accounting, including the valuation of goodwill and other intangibles. In view of the volatility of stock market returns and their inaccuracy and disjunction from the underlying cash flows of the firm, this paper proposes an alternative accounting-based approach: accountingbased risk measurement. Alternatives to beta are computed from planning and budgeting metrics at firm level to produce consistent risk estimates factoring patterns of revenue and cost behaviour weighted according to their impact on the accounting rate of return. This approach is contrasted with the analysis and interpretation of asset betas in the corporate finance literature.