The Effects of the Capital Accumulation Ratio on Wealth

14 Pages Posted: 27 Feb 2013

See all articles by Nathaniel J. Harness

Nathaniel J. Harness

Texas A&M University - Department of Economics and Finance

Michael S. Finke

The American College

Swarn Chatterjee

University of Georgia

Abstract

The capital accumulation ratio (CAR) is commonly used in academic research as a measure of household portfolio quality. This study tested whether a higher initial CAR impacts change in wealth over a decade among households in the accumulation life cycle stage. Meeting the 25% CAR guideline resulted in a 28.1% increase in net worth between 1994 and 2004. When broken into quartiles, the relationship between CAR and wealth was monotonic and statistically significant. However, this increase comes at a cost; those who met the 25% threshold CAR increased their standard deviation of net worth from 1994 to 2004 by 8.1%, and those in the highest CAR quartile saw their wealth dispersion increase by 36%. Results from this study suggest that meeting the 25% CAR threshold leads to greater wealth over time at the tradeoff of higher variation in future wealth.

Keywords: capital accumulation ratio, net worth, personal financial ratio analysis

Suggested Citation

J. Harness, Nathaniel and Finke, Michael S. and Chatterjee, Swarn, The Effects of the Capital Accumulation Ratio on Wealth. Journal of Financial Counseling and Planning, Vol. 20, No. 1, 2009, Available at SSRN: https://ssrn.com/abstract=2225363

Nathaniel J. Harness (Contact Author)

Texas A&M University - Department of Economics and Finance ( email )

College of Business and Technology
College Station, TX 77843-4353
United States

Michael S. Finke

The American College ( email )

Bryn Mawr, PA 19010
United States

Swarn Chatterjee

University of Georgia ( email )

Athens, GA 30602-3622
United States

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