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A two-step quantile regression method for discretionary accounting

Author

Listed:
  • May Huaxi Zhang

    (Beijing Institute of Technology)

  • Stanley Iat-Meng Ko

    (Tohoku University)

  • Andreas Karathanasopoulos

    (University of Dubai)

  • Chia Chun Lo

    (Georgia State University)

Abstract

This paper proposes an analytical approach that complements the traditional two-step linear regression and one-single step linear regression suggested by Chen et al. (J Account Res 56:751–796, 2018). Using the regression residual as the dependent variable in a second regression is a procedure commonly used in studying discretionary accounting. Chen et al. (J Account Res 56:751–796, 2018) propose to adopt one-step regression to avoid estimation bias and inference error. However, the mean level effect estimated by one-step OLS regression is not sufficient to capture the overall spectrum of discretionary accounting behaviors and thus may mislead its user in drawing implications. We use two-stage quantile regression to examine determinants of discretionary accounting such as discretionary accruals, discretionary expense, discretionary book-tax differences, and abnormal investment in different quantiles. We illustrate the differences between the one-step regression and our two-step quantile regression using four common discretionary accounting studies. Our results and implications reconcile, to some extent, the contradictory findings between results of the one-step OLS regression and the previous established works based on two-step regression.

Suggested Citation

  • May Huaxi Zhang & Stanley Iat-Meng Ko & Andreas Karathanasopoulos & Chia Chun Lo, 2022. "A two-step quantile regression method for discretionary accounting," Review of Quantitative Finance and Accounting, Springer, vol. 59(1), pages 1-22, July.
    • Handle: RePEc:kap:rqfnac:v:59:y:2022:i:1:d:10.1007_s11156-022-01048-w
    DOI: 10.1007/s11156-022-01048-w
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    More about this item

    Keywords

    Two-stage; Residuals; Coefficient bias; Quantile regression; Discretionary accruals;
    All these keywords.

    JEL classification:

    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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