'Price-Levels' Regressions: 'Scale Effect' or 'Distribution Effect'?

26 Pages Posted: 21 Nov 2005 Last revised: 12 Sep 2010

See all articles by Pascual Garrido Miralles

Pascual Garrido Miralles

University of Alicante-Finance & Accounting

Pablo J. Vazquez Veira

University of Alicante - Finance & Accounting

Date Written: February 1, 2006

Abstract

Easton and Sommers (ES) (2003) document the existence of an overwhelming influence of large firms in 'price-levels' regressions on US data -also Akbar and Stark (2003) on UK data. They refer to this overwhelming influence as the 'scale effect'. ES argue that the scale effect is caused by non-linearlities in the relationship between market value and the accounting variables. But non-linearlities it is only a possibility. I posit that the scale effect documented by ES is a pure econometric phenomenon. Typical variables used in Market-based Accounting Research (i.e. market value, book value, total assets, positive earnings, losses, ....) follow distributions that are very strong skewed, that is, distributions with an unique and large tail. I argue that the scale effect is related to the presence of this large tail. When I apply a logarithmic transformation -it has been recommended by the literature in the case of highly skewed distributions, tending to restore normality-, the 'scale effect' disappears.

Keywords: Scale-Effect, Price-levels Regressions, Skewness, Logarithmic Transformation

JEL Classification: G12, M41, C10

Suggested Citation

Garrido Miralles, Pascual and Vazquez, Pablo J., 'Price-Levels' Regressions: 'Scale Effect' or 'Distribution Effect'? (February 1, 2006). Available at SSRN: https://ssrn.com/abstract=851025 or http://dx.doi.org/10.2139/ssrn.851025

Pascual Garrido Miralles

University of Alicante-Finance & Accounting ( email )

Campus de San Vicente
Carretera San Vicente del Raspeig
San Vicente del Raspeig, Alicante 03690
Spain

Pablo J. Vazquez (Contact Author)

University of Alicante - Finance & Accounting ( email )

Ctra. S. Vicente s/n
03690-S. Vicente del Raspeig
Alicante, San Vicente del Raspeig - Alicante 03690
Spain

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