How Should We Estimate Value-Relevance Models? Insights from European Data

34 Pages Posted: 24 May 2017 Last revised: 5 Aug 2017

See all articles by Enrico Onali

Enrico Onali

University of Exeter Business School

Gianluca Ginesti

Department of Economics, Management, Institutions - University of Naples

Chrysovalantis Vasilakis

Bangor Business School; Catholic University of Louvain (UCL) - Department of Economics; IZA Institute of Labor Economics; University of Aegean

Date Written: May 23, 2017

Abstract

We study the consequences of unobserved heterogeneity when employing different econometric methods in the estimation of two major value-relevance models: the Price Regression Model (PRM) and the Return Regression Model (RRM). Leveraging a large panel data set of European listed companies, we first demonstrate that robust Hausman tests and Breusch-Pagan Lagrange Multiplier tests are of fundamental importance to choose correctly among a fixed-effects model, a random-effects model, or a pooled OLS model. Second, we provide evidence that replacing firm fixed-effects with country and industry fixed-effects can lead to large differences in the magnitude of the key coefficients, with serious consequences for the interpretation of the effect of changes in earnings and book values per share on firm value. Finally, we offer recommendations to applied researchers aiming to improve the robustness of their econometric strategy.

Keywords: Value-Relevance; Linear Information Model; IFRS; Price Regression Model; Return Regression Model; Panel Data

JEL Classification: C18; G12; G15; M41

Suggested Citation

Onali, Enrico and Ginesti, Gianluca and Vasilakis, Chrysovalantis, How Should We Estimate Value-Relevance Models? Insights from European Data (May 23, 2017). British Accounting Review, DOI/10.1016/j.bar.2017.05.006, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2972792

Enrico Onali (Contact Author)

University of Exeter Business School ( email )

Exeter
United Kingdom

Gianluca Ginesti

Department of Economics, Management, Institutions - University of Naples ( email )

via Cinthia, 4
Naples, Caserta 80126
Italy

Chrysovalantis Vasilakis

Bangor Business School ( email )

Bangor Business School
College Road
Gwynedd LL57 2DG, Wales LL57 2DG
United Kingdom

Catholic University of Louvain (UCL) - Department of Economics ( email )

Department of Economics
B1348 Louvain-la-Neuve, 1348
Belgium

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

University of Aegean ( email )

Chios, 82131
Greece

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