The Misuse of Regression-Based x-Scores as Dependent Variables

64 Pages Posted: 4 May 2021 Last revised: 25 Aug 2023

See all articles by Dmitri Byzalov

Dmitri Byzalov

Temple University - Fox School of Business and Management - Department of Accounting

Sudipta Basu

Temple University - Department of Accounting

Multiple version iconThere are 2 versions of this paper

Date Written: August 24, 2023

Abstract

Researchers often use regression-based x-Scores (e.g., conservatism C-Score, misstatement F-Score) from a stage 1 model as a dependent variable in stage 2. We argue that this x-Score analysis can cause coefficient biases and interpretation problems because (1) x-Score does not capture new sources of variation, and (2) the estimates often hinge on unacknowledged technical assumptions. Instead, we recommend that researchers include the test variables and the relevant controls in stage 1, obviating the need for an x-Score. In replication analyses, some important published findings change after we remove the coefficient bias caused by the use of x-Score as a dependent variable.

Keywords: two-stage estimation; exclusion restrictions; functional forms; identification

JEL Classification: M41, C20, C36, C43

Suggested Citation

Byzalov, Dmitri and Basu, Sudipta, The Misuse of Regression-Based x-Scores as Dependent Variables (August 24, 2023). Available at SSRN: https://ssrn.com/abstract=3836969 or http://dx.doi.org/10.2139/ssrn.3836969

Dmitri Byzalov (Contact Author)

Temple University - Fox School of Business and Management - Department of Accounting ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://astro.temple.edu/~dbyzalov/

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

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