Regression-Based Tests of the Market Pricing of Accounting Numbers: The Mishkin Test and Ordinary Least Squares

44 Pages Posted: 11 Jan 2007

See all articles by Arthur G. Kraft

Arthur G. Kraft

City University London - Cass Business School

Andrew J. Leone

Northwestern University

Charles E. Wasley

Simon School, University of Rochester

Multiple version iconThere are 2 versions of this paper

Date Written: May 2007

Abstract

The test developed in Mishkin [1983] (hereafter MT) has been widely used to test the rational pricing of accounting numbers. However, contrary to the perception in the accounting literature, the exclusion of variables from the MT's forecasting and pricing equations leads to an omitted variables problem which affects inferences about the rational pricing of accounting variables. Only if the omitted variables are rationally priced is their exclusion irrelevant. Failure to recognize this issue has led accounting researchers to employ the MT without appreciating how omitted variables affected the inferences they have drawn. We demonstrate that when additional explanatory variables are included in the MT, the rational pricing of accruals is not rejected. That is, the accrual anomaly documented in Sloan [1996] vanishes when additional explanatory variables are incorporated into the MT. We also show that in accounting research settings, where samples are large, OLS is equivalent to the MT. As a result, accounting researchers should consider using OLS or be more explicit about the exact advantages of the MT over OLS in their research setting.

Keywords: Market Mispricing, Market Efficiency, Accounting, OLS

JEL Classification: G14, M41, C12, C30

Suggested Citation

Kraft, Arthur Gerald and Leone, Andrew J. and Wasley, Charles E., Regression-Based Tests of the Market Pricing of Accounting Numbers: The Mishkin Test and Ordinary Least Squares (May 2007). Available at SSRN: https://ssrn.com/abstract=956094 or http://dx.doi.org/10.2139/ssrn.956094

Arthur Gerald Kraft

City University London - Cass Business School ( email )

London, EC2Y 8HB
Great Britain

Andrew J. Leone (Contact Author)

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Charles E. Wasley

Simon School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

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