How Does Unobserved Heterogeneity Affect Value Relevance?

Abstract

Most value relevance (VR) studies consider an accounting item value relevant if the regression coefficient (RC) of that item is statistically significant. Unobservable heterogeneity leads to biased RCs, interpretation of which generates incorrect inferences. To obtain unbiased RCs, the effect of unobservable heterogeneity on RCs should be mitigated. As two dimensions of unobservable heterogeneity are at the firm level and time level, outcomes with the following unobservable heterogeneity concerns are discussed: i) no fixed-effects (FE); ii) firm FE; iii) time FE; and iv) two-way (firm and time) FE. By employing a sample of Turkish firms from 2005-2014, we report several findings. First, we find that regressions with firm (time) FE yield large (low) RCs vis-à-vis regressions with no FE, and regressions with two-way FE generate balanced RCs compared to the others. Second, we compare RCs with i and iv, and conclude that the book value of equity becomes more value relevant while net income does not after controlling for unobservable heterogeneity. Last, we arbitrarily divide the entire period into two to reveal how unobserved endogeneity affects the comparison of RCs belonging to different periods. Our outcomes robustly reveal that unobserved endogeneity leads to erroneous RC comparisons.

How does leverage affect the value relevance? Evidence from Turkey

“…Statistically significant regression coefficients of BVE and earnings reported in all columns indicate that these accounting items are value relevant. These significantly positive associations between capital market figures and accounting information are consistent with the most literature (among others, see Ates, 2020;Bilgic et al, 2018;Ertuğrul & Demir, 2018) analysing Turkish listed firms in the post-IFRS adoption period.…”

“…13 Therefore, we present regression outcomes by employing the fixed-effects panel data method. Firm-invariant correlated omitted variables are another source of endogeneity (Ertuğrul & Demir, 2018). As underscored by Alali and Foote (2012), regression results can be driven by bearish and bullish market trends.…”

Yatırım Faaliyetlerinden Kaynaklanan Nakit Akışlarının Tahmin Gücü

“…Second, our econometric concerns may be different than Aktaş and Karğın (2012) and Temiz and Acar (2018) because they do not clearly describe their methodologies in detail. As highlighted by Ertuğrul and Demir (2018) and Onali et al (2017), incorrect regression methods are more likely to generate incorrect inferences; therefore, as per their suggestions and consistent with Gómez-Rodríguez et al 2012, we obtain our outcomes by performing the fixed effects methodology. We present regression outcomes not only with firm-fixed effects but also with firm-fixed and year-fixed effects.…”

“…All individual and mean VIF values are so close to 1 which should be read as multicollinearity does not significantly influence regressions. Afterward, as highlighted by Ertuğrul and Demir (2018) and Onali et al (2017), we determine the convenient regression method by performing the Hausman Test. For all Equations, the outcomes of the Hausman Test show the convenience of the use of the fixed effects method.…”

“…Hence, we control for the firm-level unobserved heterogeneity by allowing the intercept to vary across firms. Furthermore, another dimension of unobserved heterogeneity may be at the year-level (Ertuğrul & Demir, 2018). Therefore, we also provide regression outcomes by employing year dummies in order to increase the robustness of our findings; however, we do not present regression coefficients of those dummies for brevity.…”