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How should we estimate value-relevance models? Insights from European data

Onali, Enrico; Ginesti, Gianluca; Vasilakis, Chrysovalantis

Authors

Enrico Onali

Gianluca Ginesti

Chrysovalantis Vasilakis



Abstract

We study the consequences of unobserved heterogeneity when employing different econometric methods in the estimation of two major value-relevance models: the Price Regression Model (PRM) and the Return Regression Model (RRM). Leveraging a large panel data set of European listed companies, we first demonstrate that robust Hausman tests and Breusch-Pagan Lagrange Multiplier tests are of fundamental importance to choose correctly among a fixed-effects model, a random-effects model, or a pooled OLS model. Second, we provide evidence that replacing firm fixed-effects with country and industry fixed-effects can lead to large differences in the magnitude of the key coefficients, with serious consequences for the interpretation of the effect of changes in earnings and book values per share on firm value. Finally, we offer recommendations to applied researchers aiming to improve the robustness of their econometric strategy.

Journal Article Type Article
Publication Date Sep 30, 2017
Journal British Accounting Review
Print ISSN 0890-8389
Electronic ISSN 0890-8389
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 49
Issue 5
APA6 Citation Onali, E., Ginesti, G., & Vasilakis, C. (2017). How should we estimate value-relevance models? Insights from European data. British Accounting Review, 49(5), https://doi.org/10.1016/j.bar.2017.05.006
DOI https://doi.org/10.1016/j.bar.2017.05.006
Keywords Value-relevance ; Linear information model ; IFRS ; Price regression model ; Return regression model ; Panel data
Publisher URL https://www.sciencedirect.com/science/article/pii/S0890838917300306
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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