In an extended Capital Asset Pricing Model setting, I examine how the quality of accounting standards affects real investment and welfare through its impact on investment hurdle rates. In this model, cash flow uncertainty arises from two fundamental sources relating, respectively, to economic...

Employing a basic model of an economy comprising both the real and financial sectors, I show that the primitive risk measure for real investment decisions is earnings beta — defined as the (normalized) covariance between firm profitability (return on investment) and the aggregate profitability...