Alternative Income Concepts and Relative Performance Evaluations: A Comment and Extension.

Abstract While the basic question that Professors S.H. Kratchman, R.E. Malcolm and R.D. Twark (hereafter referred to as K, M and T) sought to explore is of central importance to accounting research, it appears that the methodology employed to address this issue strongly impacts upon their findings. The limitations of an ill-defined and conceptually lacking method of "current" value leads to a meaningless hybrid. The failure to properly adjust liabilities to reflect changing market rates clearly distorts the balance sheets and, hence, the performance measures utilized, i.e., return on assets and return on equity. The statistical tests are inappropriate for the null hypothesis implied by the basic research question K, M and T pose. The net result of these compounding limitations has been depicted partially in revised sets of performance measure ratios-sets which vary dramatically from K, M and T's results. These conditions all point to one inescapable conclusion; i.e., the aggregation of these limitations is of such unknown magnitude that without a complete replication, any and all interpretations K, M and T offer must be held suspect.