Estimating Response Coefficients: Pooled Versus Firm-Specific Models

Posted: 15 May 1995

See all articles by Walter R. Teets

Walter R. Teets

Gonzaga University

Charles E. Wasley

Simon School, University of Rochester

Abstract

While accounting research has shown that earnings response coefficients vary across firms many short-window accounting studies estimate earnings response coefficients using a pooled cross-sectional regression model which implicitly assumes that coefficients are identical across firms. We study the implications of this implicit assumption by comparing the cross-sectional regression approach to a firm-specific coefficient approach. In the samples we study the means of the firm-specific earnings response coefficients are on average more than 10 times as large as the corresponding coefficients estimated from the pooled cross-sectional regression model. We conclude that future research on the relation between accounting variables and returns should seriously consider the use of a firm-specific coefficient methodology in place of a cross-sectional regression methodology.

Note: 877

JEL Classification: G41

Suggested Citation

Teets, Walter R. and Wasley, Charles E., Estimating Response Coefficients: Pooled Versus Firm-Specific Models. Available at SSRN: https://ssrn.com/abstract=55473

Walter R. Teets

Gonzaga University ( email )

School of Business
Spokane, WA 99258
United States
509-328-4220 (Phone)
509-324-5811 (Fax)

Charles E. Wasley (Contact Author)

Simon School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

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