An empirical assessment of proposed solutions for resolving scale problems in value relevance accounting research

Juana Aledo Martínez, Juan Manuel García Lara, Maria T. Gonzalez-Perez and Christos A. Grambovas

Accounting and Finance, 2020, vol. 60, issue 4, 3905-3933

Abstract: We implement the most common empirical specifications, with different approaches to control for scale problems, used in studies on the value relevance of accounting information. We study whether the results offered by these specifications are consistent with the residual income valuation model and with the Burgstahler and Dichev option‐style valuation framework. Undeflated and per‐share specifications offer results that are more in line with both benchmarks. Other deflated specifications and approaches deviate, to different extents, from the expectations of both frameworks. We interpret these deviations as signs of misspecification.

Date: 2020
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