Linear valuation without OLS: the Theil-Sen estimation approach

James A. Ohlson () and Seil Kim ()
Additional contact information
James A. Ohlson: Hong Kong Polytechnic University
Seil Kim: New York University

Review of Accounting Studies, 2015, vol. 20, issue 1, No 13, 395-435

Abstract: Abstract OLS-based archival accounting research encounters two well-known problems. First, outliers tend to influence results excessively. Second, heteroscedastic error terms raise the specter of inefficient estimation and the need to scale variables. This paper applies a robust estimation approach due to Theil (Nederlandse Akademie Wetenchappen Ser A 53:386–392, 1950) and Sen (J Am Stat Assoc 63(324):1379–1389, 1968) (TS henceforth). The TS method is easily understood, and it circumvents the two problems in an elegant, direct way. Because TS and OLS are roughly equally efficient under OLS-ideal conditions (Wilcox, Fundamentals of modern statistical methods: substantially improving power and accuracy, 2nd edn. Springer, New York 2010), one naturally hypothesizes that TS should be more efficient than OLS under non-ideal conditions. This research compares the relative efficiency of OLS versus TS in cross-sectional valuation settings. There are two dependent variables, market value and subsequent year earnings; basic accounting variables appear on the equations’ right-hand side. Two criteria are used to compare the estimation methods’ performance: (i) the inter-temporal stability of estimated coefficients and (ii) the goodness-of-fit as measured by the fitted values’ ability to explain actual values. TS dominates OLS on both criteria, and often materially so. Differences in inter-temporal stability of estimated coefficients are particularly apparent, partially due to OLS estimates occasionally resulting in “incorrect” signs. Conclusions remain even if winsorization and the scaling of variables modify OLS.

Keywords: Linear valuation; Estimation methods; Theil-Sen estimator; OLS (search for similar items in EconPapers)
JEL-codes: G17 M40 M41 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s11142-014-9300-0 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:reaccs:v:20:y:2015:i:1:d:10.1007_s11142-014-9300-0

Ordering information: This journal article can be ordered from
http://www.springer.com/accounting/journal/11142

DOI: 10.1007/s11142-014-9300-0

Access Statistics for this article

Review of Accounting Studies is currently edited by Paul Fischer

More articles in Review of Accounting Studies from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().