Use of R-Squared in Accounting Research: Measuring Changes in Value Relevance Over the Last Four Decades

45 Pages Posted: 8 Dec 1998

See all articles by Stephen Brown

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance

Kin Lo

University of British Columbia (UBC) - Sauder School of Business

Thomas Z. Lys

Northwestern University - Kellogg School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 24, 1998

Abstract

This study examines the properties of the R-squared metric frequently used in accounting research as a measure of value relevance. Analytical results show that the metric is unreliable in the presence of scale effects. Specifically, we show that the metric is upwardly biased for accounting studies, and the bias is increasing in the scale factor's coefficient of variation. We conclude that it is invalid to make cross-sample comparisons of R-squared, whether the samples are drawn cross-sectionally or over time, unless the researcher controls for differences in the coefficient of variation across the samples. Applying this theory empirically, our results show that the finding of increasing value relevance in Collins, Maydew, and Weiss (1997) and Francis and Schipper (1998) are attributable to over time increases in the coefficient of variation of scale. After controlling for these effects, we find that there has been a decline in value relevance as measured by R-squared.

JEL Classification: C51, G10, G38, G12, M41

Suggested Citation

Brown, Stephen and Lo, Kin and Lys, Thomas Z., Use of R-Squared in Accounting Research: Measuring Changes in Value Relevance Over the Last Four Decades (November 24, 1998). Sauder School of Business Working Paper. Available at SSRN: https://ssrn.com/abstract=141056 or http://dx.doi.org/10.2139/ssrn.141056

Stephen Brown

University of Maryland - Department of Accounting & Information Assurance ( email )

Robert H. Smith School of Business
College Park, MD 20742-9157
United States

Kin Lo (Contact Author)

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-8430 (Phone)
604-822-9470 (Fax)

HOME PAGE: http://www.sauder.ubc.ca/Faculty/People/Faculty_Members/Lo_Kin

Thomas Z. Lys

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Department of Accounting & Information Systems
Evanston, IL 60208
United States
847-491-2673 (Phone)
847-467-1202 (Fax)

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