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Regression-Based Tests of the Market Pricing of Accounting Numbers: The Mishkin Test and Ordinary Least Squares

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  • ARTHUR KRAFT
  • ANDREW J. LEONE
  • CHARLES E. WASLEY

Abstract

ABSTRACT The test developed in Mishkin [1983] (hereafter, MT) is widely used to test the rational pricing of accounting numbers. However, contrary to the perception in the accounting literature, the exclusion of variables from the MT's forecasting and pricing equations leads to an omitted variables problem that affects inferences about the rational pricing of accounting variables. Only if the omitted variables are rationally priced is their exclusion irrelevant. Failure to recognize this issue leads accounting researchers to employ the MT without appreciating how omitted variables affect the inferences they draw. We demonstrate that when additional explanatory variables are included in the MT, the rational pricing of accruals is not rejected. That is, the accrual anomaly documented in Sloan [1996] vanishes when additional explanatory variables are incorporated into the MT. We also show that in accounting research settings, where samples are large, ordinary least squares (OLS) is equivalent to the MT. As a result, accounting researchers should consider using OLS or be more explicit about the exact advantages of the MT over OLS in their research setting. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2007.

Suggested Citation

  • Arthur Kraft & Andrew J. Leone & Charles E. Wasley, 2007. "Regression-Based Tests of the Market Pricing of Accounting Numbers: The Mishkin Test and Ordinary Least Squares," Journal of Accounting Research, Wiley Blackwell, vol. 45(5), pages 1081-1114, December.
  • Handle: RePEc:bla:joares:v:45:y:2007:i:5:p:1081-1114
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    Citations

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    Cited by:

    1. Balboa, Marina & López-Espinosa, Germán & Rubia, Antonio, 2013. "Nonlinear dynamics in discretionary accruals: An analysis of bank loan-loss provisions," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5186-5207.
    2. Vincent Chen & Samuel Tiras, 2015. "‘Other information’ as an explanatory factor for the opposite market reactions to earnings surprises," Review of Quantitative Finance and Accounting, Springer, vol. 45(4), pages 757-784, November.
    3. repec:spr:reaccs:v:23:y:2018:i:1:d:10.1007_s11142-017-9436-9 is not listed on IDEAS
    4. Jeffrey J. Coulton & Caitlin M. S. Ruddock & Stephen L. Taylor, 2014. "The Informativeness of Dividends and Associated Tax Credits," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(9-10), pages 1309-1336, November.
    5. Houdou Basse Mama & Rachidi Kotchoni, 2017. "Investor Relations' Quality and Mispricing," EconomiX Working Papers 2017-33, University of Paris Nanterre, EconomiX.
    6. Richardson, Scott & Tuna, Irem & Wysocki, Peter, 2010. "Accounting anomalies and fundamental analysis: A review of recent research advances," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 410-454, December.
    7. Diana MURESAN, 2015. "The Mishkin Test: An Analysis Of Model Extensions," SEA - Practical Application of Science, Fundația Română pentru Inteligența Afacerii, Editorial Department, issue 7, pages 393-400, April.
    8. Yong-Chul Shin & Kun Yu & Neil Fargher, 2016. "Do investors misprice components of net periodic pension cost?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 56(3), pages 845-878, September.
    9. Strydom, Maria & Skully, Michael & Veeraraghavan, Madhu, 2014. "Is the accrual anomaly robust to firm-level analysis?," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 157-165.
    10. repec:bla:acctfi:v:57:y:2017:i:1:p:199-237 is not listed on IDEAS
    11. Lewellen, Jonathan, 2010. "Accounting anomalies and fundamental analysis: An alternative view," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 455-466, December.
    12. Theodosia Konstantinidi & Arthur Kraft & Peter F. Pope, 2016. "Asymmetric Persistence and the Market Pricing of Accruals and Cash Flows," Abacus, Accounting Foundation, University of Sydney, vol. 52(1), pages 140-165, March.
    13. repec:eee:reacre:v:25:y:2013:i:2:p:169-184 is not listed on IDEAS
    14. Ashok Robin & Qiang Wu, 2015. "Firm growth and the pricing of discretionary accruals," Review of Quantitative Finance and Accounting, Springer, vol. 45(3), pages 561-590, October.
    15. Venter, Elmar R. & Cahan, Steven F. & Emanuel, David, 2013. "Mandatory Earnings Disaggregation and the Persistence and Pricing of Earnings Components," The International Journal of Accounting, Elsevier, vol. 48(1), pages 26-53.
    16. Gegenfurtner, Bernhard & Ampenberger, Markus & Kaserer, Christoph, 2009. "The impact of managerial ownership, monitoring and accounting standard choice on accrual mispricing," CEFS Working Paper Series 2009-02, Technische Universität München (TUM), Center for Entrepreneurial and Financial Studies (CEFS).

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