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More Powerful Portfolio Approaches to Regressing Abnormal Returns on Firm-Specific Variables for Cross-Sectional Studies

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  • Chandra, Ramesh
  • Balachandran, Bala V

Abstract

Ordinary Least Squares regression ignores both heteroscedasticity and cross-correlations of abnormal returns; therefore, tests of regression coefficients are weak and biased. A portfolio ordinary least squares (POLS) regression accounts for correlations and ensures unbiasedness of tests, but does not improve their power. The authors propose portfolio weighted least squares (PWLS) and portfolio constant correlation model (PCCM) regressions to improve the power. Both utilize the heteroscedasticity of abnormal returns in estimating the coefficients; PWLS ignores the correlations, while PCCM uses intra- and inter-industry correlations. Simulation results show that both lead to more powerful tests of regression coefficients than POLS. Copyright 1992 by American Finance Association.

Suggested Citation

  • Chandra, Ramesh & Balachandran, Bala V, 1992. "More Powerful Portfolio Approaches to Regressing Abnormal Returns on Firm-Specific Variables for Cross-Sectional Studies," Journal of Finance, American Finance Association, vol. 47(5), pages 2055-2070, December.
    • Handle: RePEc:bla:jfinan:v:47:y:1992:i:5:p:2055-70
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    Cited by:

    1. May, Anthony D., 2014. "Corporate liquidity and the contingent nature of bank credit lines: Evidence on the costs and consequences of bank default," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 410-429.
    2. Cowan, Arnold R. & Howell, Jann C. & Power, Mark L., 2002. "Wealth effects of banks' rights to market and originate annuities," The Quarterly Review of Economics and Finance, Elsevier, vol. 42(3), pages 487-503.
    3. Block, Joern & Ulrich, Lennart, 2023. "Are family owners and managers good stewards in global crises? Evidence from stock market reactions to Covid-19," Journal of Family Business Strategy, Elsevier, vol. 14(1).
    4. da Graça, Tarcisio B., 2010. "Improving the statistical power of financial event studies: The inverse variance weighted average-based test," Journal of Empirical Finance, Elsevier, vol. 17(4), pages 803-817, September.
    5. Albert J. Menkveld & Emiliano Pagnotta & Marius A. Zoican, 2013. "Central Clearing and Asset Prices," Tinbergen Institute Discussion Papers 13-181/IV/DSF67, Tinbergen Institute.
    6. Prather-Kinsey, Jenice, 2006. "Developing countries converging with developed-country accounting standards: Evidence from South Africa and Mexico," The International Journal of Accounting, Elsevier, vol. 41(2), pages 141-162.

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