IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v20y1985i04p501-515_01.html
   My bibliography  Save this article

The Application of Errors-in-Variables Methodology to Capital Market Research: Evidence on the Small-Firm Effect

Author

Listed:
  • Booth, James R.
  • Smith, Richard L.

Abstract

Errors in variables due to nonsynchronous trading and benchmark error are significant problems for capital market research. This paper develops the use of direct and reverse regression to bound true coefficient estimates when the data exhibit error structures arising from these two sources both separately and jointly. The approach appears to have broad applicability for capital markets research. As an example, the paper reexamines the small-firm effect to show that it cannot be attributed to nonsynchronous trading or benchmark error in the estimated variance of the market portfolio. This result is shown to hold even when the tax-selling effect is controlled for by excluding January returns.

Suggested Citation

  • Booth, James R. & Smith, Richard L., 1985. "The Application of Errors-in-Variables Methodology to Capital Market Research: Evidence on the Small-Firm Effect," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 20(04), pages 501-515, December.
  • Handle: RePEc:cup:jfinqa:v:20:y:1985:i:04:p:501-515_01
    as

    Download full text from publisher

    File URL: http://journals.cambridge.org/abstract_S0022109000011844
    File Function: link to article abstract page
    Download Restriction: no

    References listed on IDEAS

    as
    1. Galai, Dan & Masulis, Ronald W., 1976. "The option pricing model and the risk factor of stock," Journal of Financial Economics, Elsevier, vol. 3(1-2), pages 53-81.
    2. Merton, Robert C., 1977. "On the pricing of contingent claims and the Modigliani-Miller theorem," Journal of Financial Economics, Elsevier, vol. 5(2), pages 241-249, November.
    3. James H. Scott Jr., 1976. "A Theory of Optimal Capital Structure," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 33-54, Spring.
    4. Turnbull, Stuart M, 1979. "Debt Capacity," Journal of Finance, American Finance Association, vol. 34(4), pages 931-940, September.
    5. Brennan, Michael J & Schwartz, Edwardo S, 1978. "Corporate Income Taxes, Valuation, and the Problem of Optimal Capital Structure," The Journal of Business, University of Chicago Press, vol. 51(1), pages 103-114, January.
    6. Kane, Alex & Marcus, Alan J & McDonald, Robert L, 1984. " How Big Is the Tax Advantage to Debt?," Journal of Finance, American Finance Association, vol. 39(3), pages 841-853, July.
    7. Miller, Merton H, 1977. "Debt and Taxes," Journal of Finance, American Finance Association, vol. 32(2), pages 261-275, May.
    8. Constantinides, George M, 1978. "Market Risk Adjustment in Project Valuation," Journal of Finance, American Finance Association, vol. 33(2), pages 603-616, May.
    9. Kim, E Han, 1978. "A Mean-Variance Theory of Optimal Capital Structure and Corporate Debt Capacity," Journal of Finance, American Finance Association, vol. 33(1), pages 45-63, March.
    10. McDonald, Robert & Siegel, Daniel, 1984. " Option Pricing When the Underlying Asset Earns a Below-Equilibrium Rate of Return: A Note," Journal of Finance, American Finance Association, vol. 39(1), pages 261-265, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tofallis, Chris, 2008. "Investment volatility: A critique of standard beta estimation and a simple way forward," European Journal of Operational Research, Elsevier, vol. 187(3), pages 1358-1367, June.
    2. Chris Tofallis, 2011. "Investment Volatility: A Critique of Standard Beta Estimation and a Simple Way Forward," Papers 1109.4422, arXiv.org.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:20:y:1985:i:04:p:501-515_01. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Keith Waters). General contact details of provider: http://journals.cambridge.org/jid_JFQ .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.