Scale Effects in Capital Markets-Based Accounting Research

36 Pages Posted: 12 May 2009

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

Greg Clinch

Independent

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Abstract

Based on data simulated using a modified Ohlson (1995) valuation model, we investigate effects on inferences of five potential scale-related effects: multiplicative and additive omitted scale factors, scale-varying coefficients, survivorship, and heteroscedasticity. We find that diagnostics identified in prior research are not successful in detecting or distinguishing these scale effects. Thus, we investigate the effectiveness at mitigating scale effects of six specifications of regressions of equity market value on equity book value and earnings: undeflated, share-deflated, equity book value-deflated, lagged price-deflated, returns, and equity market value-deflated. For each specification, we compare frequency of correct rejection that the coefficients equal zero, coefficient bias and absolute error, and regression explanatory power. We find that share-deflated and undeflated specifications generally perform the best, regardless of the type of scale effect.

Suggested Citation

Barth, Mary E. and Clinch, Greg, Scale Effects in Capital Markets-Based Accounting Research. Journal of Business Finance & Accounting, Vol. 36, Nos. 3-4, pp. 253-288, April/May 2009. Available at SSRN: https://ssrn.com/abstract=1400377 or http://dx.doi.org/10.1111/j.1468-5957.2009.02133.x

Mary E. Barth (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Greg Clinch

Independent

No Address Available

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