Adjusted Earnings Yields and Real Rates of Return

Abstract

An accurate forecast of real return requires that accounting and debt adjustments be made to reported earnings. This article presents methodologies that investors can use to estimate the accounting and debt adjustments for individual companies and offers evidence, derived from a predictive regression model, that investors should consider these adjustments important. The article also reviews the use of nonfinancial corporate debt and makes the case that investors should view the use of debt by nonfinancial companies more positively than they currently do.