The Misuse of Regression-Based x-Scores as Dependent Variables in Accounting Research

59 Pages Posted: 4 May 2021

See all articles by Dmitri Byzalov

Dmitri Byzalov

Temple University - Fox School of Business and Management - Department of Accounting

Sudipta Basu

Temple University - Department of Accounting

Date Written: April 29, 2021

Abstract

Researchers often use regression-based x-Scores (e.g., C-Score, F-Score, and Z-Score) from a stage 1 model as a dependent variable in stage 2. We argue that this x-Score analysis causes major biases and interpretation problems because (1) x-Score cannot capture new sources of variation, and (2) the estimates are often artifacts of arbitrary technical assumptions. Instead, researchers should just include the test variables and the relevant controls in stage 1, obviating the need for an x Score. We confirm these arguments using simulations. In replication analyses, major published findings change after we remove the bias caused by the misuse of x Score.

Keywords: two-stage estimation; exclusion restrictions; functional forms; identification

JEL Classification: M41, C20, C36, C43

Suggested Citation

Byzalov, Dmitri and Basu, Sudipta, The Misuse of Regression-Based x-Scores as Dependent Variables in Accounting Research (April 29, 2021). Available at SSRN: https://ssrn.com/abstract=3836969 or http://dx.doi.org/10.2139/ssrn.3836969

Dmitri Byzalov (Contact Author)

Temple University - Fox School of Business and Management - Department of Accounting ( email )

Philadelphia, PA 19122
United States

HOME PAGE: http://astro.temple.edu/~dbyzalov/

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

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