Use of R2 in accounting research: Measuring changes in value relevance over the last four decades

Stephen Brown*, Kin Lo, Thomas Lys

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

314 Scopus citations

Abstract

Accounting research frequently uses R2, for example, to measure value relevance. We show analytically that scale effects present in levels regressions increase R2, and this effect increases in the scale factor's coefficient of variation. Thus, between-sample comparisons of R2 are invalid, unless one controls for differences in the scale factor's coefficient of variation. Applying our analysis to prior research, we show that the documented increase in value relevance of accounting is attributable to increases in the coefficient of variation of the scale factor. Controlling for this effect, there has been a decline in value relevance, as measured by R2.

Original languageEnglish (US)
Pages (from-to)83-115
Number of pages33
JournalJournal of Accounting and Economics
Volume28
Issue number2
DOIs
StatePublished - Dec 1999

Keywords

  • C51
  • Capital markets
  • Econometric models
  • Equity valuation
  • Financial reporting
  • G10
  • G38
  • M41

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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