Scale Effects in Capital Markets-Based Accounting Research

65 Pages Posted: 31 Jan 2000 Last revised: 13 Jan 2009

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

Greg Clinch

Macquarie Business School

Multiple version iconThere are 2 versions of this paper

Date Written: January 1, 2009

Abstract

Based on data simulated using a modified Ohlson (1995) valuation model, we investigate effects on inferences of five potential scale-related effects: multiplicative and additive omitted scale factors, scale-varying coefficients, survivorship, and heteroscedasticity. We find that diagnostics identified in prior research are not successful in detecting or distinguishing these scale effects. Thus, we investigate the effectiveness at mitigating scale effects of six specifications of regressions of equity market value on equity book value and earnings: undeflated, share-deflated, equity book value-deflated, lagged price-deflated, returns, and equity market value-deflated. For each specification, we compare frequency of correct rejection that the coefficients equal zero, coefficient bias and absolute error, and regression explanatory power. We find that share-deflated and undeflated specifications generally perform the best, regardless of the type of scale effect.

Keywords: Scale Effects, Capital Markets, Book Value, Earnings

JEL Classification: M41, C21

Suggested Citation

Barth, Mary E. and Clinch, Greg, Scale Effects in Capital Markets-Based Accounting Research (January 1, 2009). Journal of Business Finance and Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=201228 or http://dx.doi.org/10.2139/ssrn.201228

Mary E. Barth (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Greg Clinch

Macquarie Business School ( email )

Eastern Rd.
North Ryde
Sydney, NSW 2109
United States

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