This paper revises the standard interpretation of the book rate of return as a measure of profitability. Rather, due to conservative accounting, the book rate of return informs about risk and the expected return to the investor. In contrast to asset pricing research where the book rate of return...

Many accounting numbers appear in standard factor models, including book value, investment, return on equity (ROE), and other profitability measures. However, they do so without a clear explanation of why they indicate investment risk. The papers shows that these numbers are generated under...