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The misuse of regression-based x-Scores as dependent variables

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  • Byzalov, Dmitri
  • Basu, Sudipta

Abstract

Researchers often use regression-based x-Scores (e.g., conservatism C-Score, misstatement F-Score) from a stage 1 model as a dependent variable in stage 2. We argue that this x-Score analysis can cause coefficient biases and interpretation problems because (1) x-Score does not capture new sources of variation, and (2) the estimates often hinge on unacknowledged technical assumptions. Instead, we recommend that researchers include the test variables and the relevant controls in stage 1, obviating the need for an x-Score. In replication analyses, some important published findings change after we remove the coefficient bias caused by the use of x-Score as a dependent variable.

Suggested Citation

  • Byzalov, Dmitri & Basu, Sudipta, 2024. "The misuse of regression-based x-Scores as dependent variables," Journal of Accounting and Economics, Elsevier, vol. 77(2).
    • Handle: RePEc:eee:jaecon:v:77:y:2024:i:2:s0165410123000678
    DOI: 10.1016/j.jacceco.2023.101643
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    More about this item

    Keywords

    Two-stage estimation; Exclusion restriction; Functional form; Identification;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation
    • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation

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