Significance Testing in Empirical Finance: A Critical Review and Assessment

38 Pages Posted: 18 Mar 2014 Last revised: 29 Jan 2017

See all articles by Jae H. Kim

Jae H. Kim

La Trobe University - School of Economics and Finance

Philip Ji

Monash University - Department of Accounting; Financial Research Network (FIRN)

Date Written: June 8, 2015

Abstract

This paper critically reviews the practice of significance testing in modern finance research. Employing a survey of recently published articles in four top-tier finance journals, we find that the conventional significance levels are exclusively used with little consideration of the key factors such as the sample size, power of the test, and expected losses. We also find that statistically significant results reported in many surveyed papers become questionable, if Bayesian method or revised standards for evidence were instead used. We observe strong evidence of publication bias in favour of statistical significance. We propose that substantial changes be made to the current practice of significance testing in finance research, in order to improve research credibility and integrity.

Keywords: Level of significance, Lindley paradox, Massive sample size, Meehl’s conjecture, Publication bias, Spurious statistical significance

JEL Classification: C12, G12

Suggested Citation

Kim, Jae H. and Ji, Philip Inyeob, Significance Testing in Empirical Finance: A Critical Review and Assessment (June 8, 2015). Journal of Empirical Finance,34, 1-14.; FIRN Research Paper. Available at SSRN: https://ssrn.com/abstract=2410049 or http://dx.doi.org/10.2139/ssrn.2410049

Jae H. Kim (Contact Author)

La Trobe University - School of Economics and Finance ( email )

Department of Finance
La Trobe Business School
Bundoora, IN 3086
Australia

Philip Inyeob Ji

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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