Use of Fuller's Technique to Reduce Measurement Error in the Returns/Earnings Association

Use of Fuller's Technique to Reduce Measurement Error in the Returns/Earnings Association Empirical estimates of the earnings response coefficient have consistently been lower than theory predicts. This may be because empirical proxies for unexpected earnings contain measurement error. I demonstrate and evaluate the use of a recently developed technique by Fuller that yields consistent parameter estimates in the presence of measurement error. The empirical results indicate that this technique is successful at mitigating measurement error bias in the earnings response coefficient. The earnings response coefficient increases by as much as 52%. In contrast, replication of the techniques performed in previous studies increases the earnings response coefficient by only 8%. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Use of Fuller's Technique to Reduce Measurement Error in the Returns/Earnings Association

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 2000 by Kluwer Academic Publishers
Subject
Finance; Corporate Finance; Accounting/Auditing; Econometrics; Operation Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1023/A:1008311929385
Publisher site
See Article on Publisher Site

Abstract

Empirical estimates of the earnings response coefficient have consistently been lower than theory predicts. This may be because empirical proxies for unexpected earnings contain measurement error. I demonstrate and evaluate the use of a recently developed technique by Fuller that yields consistent parameter estimates in the presence of measurement error. The empirical results indicate that this technique is successful at mitigating measurement error bias in the earnings response coefficient. The earnings response coefficient increases by as much as 52%. In contrast, replication of the techniques performed in previous studies increases the earnings response coefficient by only 8%.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Oct 8, 2004

References

  • The Information Content of Earnings and Prices: A Simultaneous Equations Approach
    Beaver, W.; McAnally, M.L.; Stinson, C.H.

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