Outliers and Robust Inference in Archival Accounting Research

86 Pages Posted: 14 Jul 2021 Last revised: 10 Feb 2022

See all articles by Joachim Gassen

Joachim Gassen

Humboldt University of Berlin - School of Business and Economics; TRR 266 Accounting for Transparency

David Veenman

University of Amsterdam - Amsterdam Business School (ABS)

Date Written: February 2022

Abstract

This study examines the nature of outliers in archival research and evaluates the merits and limitations of robust regression estimators in identifying and downweighting their influence. Using simulated and actual data, we demonstrate how outliers arise from the data-generating process, research design choices such as scaling, and model misspecification. We next show that robust regression estimators can generate substantially more precise estimates than OLS in common archival data, but also conclude that these estimators can bias inferences because they downweight substantial and nonrandom subsets of the data. We recommend researchers to be cautious in implementing robust regression estimators and to evaluate and disclose the sensitivity of these estimators to alternative design choices. Whether robust estimators improve inference critically hinges on the nature of the observations that are downweighted.

Keywords: Outliers, robust regression, MM-estimation, scaling, leverage, efficiency, skewness, non-GAAP reporting, accrual-cash flow relation

JEL Classification: C13, C15, C18, M41

Suggested Citation

Gassen, Joachim and Veenman, David, Outliers and Robust Inference in Archival Accounting Research (February 2022). Available at SSRN: https://ssrn.com/abstract=3880942 or http://dx.doi.org/10.2139/ssrn.3880942

Joachim Gassen

Humboldt University of Berlin - School of Business and Economics ( email )

Spandauer Str. 1
Berlin, D-10099
Germany
+49 30 2093 5764 (Phone)
+49 30 2093 5670 (Fax)

TRR 266 Accounting for Transparency

Warburger Stra├če 100
Paderborn, 33098
Germany

David Veenman (Contact Author)

University of Amsterdam - Amsterdam Business School (ABS) ( email )

Roetersstraat 18
Amsterdam, 1018WB
Netherlands

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