Scale and Scale Effects in Market-Based Accounting Research

Abstract

The nature of the data we usually encounter in market-based accounting research is such that the results of the regression of market capitalization on financial statement data are driven by a relatively small subset of the very largest firms in the sample. We refer to this overwhelming influence of the largest firms as the scale Firms with large price (and large per share accounting variables) have a similar effect. This effect is more than heteroscedasticity. It arises due to the non-linearity in the relation between market capitalization (price share) and the financial statement variables.