Measurement Error in Dependent Variables in Accounting: Illustrations Using Google Ticker Search and Simulations

66 Pages Posted: 14 Jun 2019 Last revised: 28 Jun 2019

See all articles by Ed deHaan

Ed deHaan

University of Washington - Michael G. Foster School of Business

Alastair Lawrence

London Business School

Robin Litjens

Tilburg University - CentER and Department of Accountancy

Date Written: May 1, 2019

Abstract

This paper illustrates how measurement error (“ME”) in dependent variables not only reduces power but, under common conditions in accounting and finance studies, can lead to statistical biases and erroneous inferences. These confounds exist because ME in accounting-based proxies is typically nonadditive, which violates the simple assumptions discussed in most econometrics texts. We demonstrate the effects of nonadditive ME in papers using Google ticker search volume index (“SVI”) as a measure of investor attention. We show that ME in SVI generates both type I and II errors in published studies, and we introduce a new measure of investor-specific ticker search to reduce biases in future research. We also use simulations to show that small amounts of ME in accounting asset values can confound inferences in commonly-used accounting-based proxies such as ROA and Tobin’s Q. Our findings contribute to the literature by improving researchers’ understanding of the effects of ME in common analyses.

Keywords: dependent variables, measurement error, bias, Google search, SVI

JEL Classification: C13, C15, M41

Suggested Citation

deHaan, Ed and Lawrence, Alastair and Litjens, Robin, Measurement Error in Dependent Variables in Accounting: Illustrations Using Google Ticker Search and Simulations (May 1, 2019). Available at SSRN: https://ssrn.com/abstract=3398287 or http://dx.doi.org/10.2139/ssrn.3398287

Ed DeHaan

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

Alastair Lawrence

London Business School ( email )

Regent's Park
London
United Kingdom

HOME PAGE: http://Www.alastairlawrence.net

Robin Litjens (Contact Author)

Tilburg University - CentER and Department of Accountancy ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

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