Research design issues in grouping-based tests

Thomas Lys*, Jowell S. Sabino

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

18 Scopus citations

Abstract

With grouping, a sample is sorted by an observable variable and the mean values of the dependent variable in the extreme-ranked groups are compared. We show that test power is maximized when the two extreme groups each contain 27% of the sample, a much larger percentage than that typically used in the literature. This result is not sensitive to the distribution of the dependent variable. We also show that regression is unambiguously more powerful than grouping, even when the independent variable is measured with error.

Original languageEnglish (US)
Pages (from-to)355-387
Number of pages33
JournalJournal of Financial Economics
Volume32
Issue number3
DOIs
StatePublished - Dec 1992

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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