Regression-Based Tests of the Market Pricing of Accounting Numbers: The Mishkin Test and Ordinary Least Squares
44 Pages Posted: 11 Jan 2007
Date Written: May 2007
The test developed in Mishkin  (hereafter MT) has been widely used to test the rational pricing of accounting numbers. However, contrary to the perception in the accounting literature, the exclusion of variables from the MT's forecasting and pricing equations leads to an omitted variables problem which affects inferences about the rational pricing of accounting variables. Only if the omitted variables are rationally priced is their exclusion irrelevant. Failure to recognize this issue has led accounting researchers to employ the MT without appreciating how omitted variables affected the inferences they have drawn. We demonstrate that when additional explanatory variables are included in the MT, the rational pricing of accruals is not rejected. That is, the accrual anomaly documented in Sloan  vanishes when additional explanatory variables are incorporated into the MT. We also show that in accounting research settings, where samples are large, OLS is equivalent to the MT. As a result, accounting researchers should consider using OLS or be more explicit about the exact advantages of the MT over OLS in their research setting.
Keywords: Market Mispricing, Market Efficiency, Accounting, OLS
JEL Classification: G14, M41, C12, C30
Suggested Citation: Suggested Citation