The Effects of Cross-Sectional Scale Differences on Regression Results in Empirical Accounting Research

Posted: 26 Jun 1996

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

Sanjay Kallapur

Indian School of Business

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Abstract

This study investigates coefficient bias and heteroscedasticity resulting from scale differences in accounting levels-based research designs analytically and using simulations based on accounting data. Findings indicate that including a scale proxy as an independent variable is more effective than deflation at mitigating coefficient bias, even if the proxy is 95 percent correlated with the true scale factor. In fact, deflation can worsen coefficient bias. Also, deflation often does not noticeably reduce heteroscedasticity and can decrease estimation efficiency. White (1980) standard errors are close to the true ones in regressions using undeflated variables. Replications of specifications in three recent accounting studies confirm the simulation findings. The findings suggest that when scale differences are of concern, accounting researchers should include a scale proxy as an independent variable and report inferences based on White standard errors.

JEL Classification: M41, C51

Suggested Citation

Barth, Mary E. and Kallapur, Sanjay, The Effects of Cross-Sectional Scale Differences on Regression Results in Empirical Accounting Research. CONTEMPORARY ACCOUNTING RESEARCH, Vol 13, No 2, Fall 1996, Available at SSRN: https://ssrn.com/abstract=2664

Mary E. Barth (Contact Author)

Stanford University - Graduate School of Business ( email )

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Stanford, CA 94305-5015
United States
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Sanjay Kallapur

Indian School of Business ( email )

ISB Campus, Gachibowli
Hyderabad, 500 032
India
+91 40 2318 7138 (Phone)

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