 Scale and the Scale Effect in Market‐based Accounting ResearchPeter D. Easton and Gregory A. Sommers Journal of Business Finance & Accounting, 2003, vol. 30, issue 1‐2, 25-56 Abstract: The nature of the data we usually encounter in market‐based accounting research is such that the results of the regressions of market capitalization on financial statement variables (referred to ‘price‐levels’ regressions) are driven by a relatively small subset of the very largest firms in the sample. We refer to this overwhelming influence of the largest firms as the ‘scale effect’. This effect is more than heteroscedasticity. It arises due to the non‐linearity in the relation between market capitalization and the financial statement variables. We present the case that scale is market capitalization rather than a correlated omitted variable. Since scale is market capitalization, we advocate its use as a deflator in a regression estimated using weighted least squares. This regression overcomes the scale effect and the resultant regression residuals are more economically meaningful. Christie's (1987) depiction of scale is the same as ours but he advocates the use of the returns regression specification in order to avoid scale effects. We agree that returns regressions should be used unless the research question calls for a price‐levels regression. Date: 2003 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:bla:jbfnac:v:30:y:2003:i:1-2:p:25-56 Ordering information: This journal article can be ordered from Access Statistics for this article Journal of Business Finance & Accounting is currently edited by P. F. Pope, A. W. Stark and M. Walker More articles in Journal of Business Finance & Accounting from Wiley Blackwell |
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