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Residuals from two‐step research designs

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  • Andrew B. Jackson

Abstract

A number of studies have begun to question the appropriateness of the widespread and pervasive usage of regressions in two‐step research designs in the accounting literature to obtain variables. The use of residuals from a first‐step model as a dependent variable in a second step has been used in contexts such as earnings management and unexpected audit fees. In this paper, I provide a discussion of the issues within the use of residuals from a first‐step model in a second step. Taking the case of discretionary accruals models, I demonstrate some of the model specification issues explicitly and implicitly considered within these criticisms. I then add a discussion over some concerns regarding the economic interpretation in the use of first‐step residuals.

Suggested Citation

  • Andrew B. Jackson, 2022. "Residuals from two‐step research designs," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4345-4358, December.
    • Handle: RePEc:bla:acctfi:v:62:y:2022:i:4:p:4345-4358
    DOI: 10.1111/acfi.12992
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    References listed on IDEAS

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    1. Andrew B. Jackson, 2018. "Discretionary Accruals: Earnings Management ... or Not?," Abacus, Accounting Foundation, University of Sydney, vol. 54(2), pages 136-153, June.
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    5. Wei Chen & Paul Hribar & Samuel Melessa, 2018. "Incorrect Inferences When Using Residuals as Dependent Variables," Journal of Accounting Research, Wiley Blackwell, vol. 56(3), pages 751-796, June.
    6. Demetris Christodoulou & Le Ma & Andrey Vasnev, 2018. "Inference†in†residuals as an Estimation Method for Earnings Management," Abacus, Accounting Foundation, University of Sydney, vol. 54(2), pages 154-180, June.
    7. Erik L. Beardsley & Dennis R. Lassila & Thomas C. Omer, 2019. "How Do Audit Offices Respond to Audit Fee Pressure? Evidence of Increased Focus on Nonaudit Services and their Impact on Audit Quality," Contemporary Accounting Research, John Wiley & Sons, vol. 36(2), pages 999-1027, June.
    8. Kothari, S.P. & Leone, Andrew J. & Wasley, Charles E., 2005. "Performance matched discretionary accrual measures," Journal of Accounting and Economics, Elsevier, vol. 39(1), pages 163-197, February.
    9. Ru Gao & Baljit K. Sidhu, 2018. "The Impact of Mandatory International Financial Reporting Standards Adoption on Investment Efficiency: Standards, Enforcement, and Reporting Incentives," Abacus, Accounting Foundation, University of Sydney, vol. 54(3), pages 277-318, September.
    10. Nathan T. Marshall & Joseph H. Schroeder & Teri Lombardi Yohn, 2019. "An Incomplete Audit at the Earnings Announcement: Implications for Financial Reporting Quality and the Market's Response to Earnings†," Contemporary Accounting Research, John Wiley & Sons, vol. 36(4), pages 2035-2068, December.
    11. Juewei Wang & Jenny Jing Wang & Steve Tulig & Weidong Zhang & Zeyu Li, 2022. "A study on the effect of joint supervision between auditors and sponsors: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2757-2780, June.
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