Abstract
The main purpose of this paper is to compare the White (1980) heteroskedasticity-consistent (HC) covariance matrix estimator with alternative estimators. Many regression packages compute the White (1980) heteroskedasticity-consistent (HC) covariance matrix estimator. The common procedure in Accounting and Finance research to deal with the heteroskedasticity problem is based on this estimator, despite its worse finite-samples properties when compared with other consistent estimators. In this paper we compare several HC covariance matrix estimators based on a sample of 3706 European listed companies from Austria, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Sweden and the United Kingdom. We conclude that HC standard errors increase when finite-samples more appropriate estimators are considered and in the most part of countries the Ohlson (1995) model coefficients estimates became statistically insignificant. This can be explained by the high leverage points in the design matrix. To the best of our knowledge it is the first time that these alternative estimators are compared with the one of White (1980) in accounting research.
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Notes
The second and third objectives have been rearranged in accordance to a referee’s suggestion.
As expected, the results of the White (1980) test (not shown in the paper) lead to the rejection of the homoskedasticity assumption in all countries.
R is a free software environment for statistical computing and graphics. It compiles and runs on a wide variety of UNIX platforms, Windows and MacOS. The program R can be downloaded from: http://cran.r-project.org.
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The authors would like to thank the editor and two anonymous referees for a number of very useful suggestions and comments.
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Appendix
See Tables 8, 9, 10, 11, and 12.
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Curto, J.D., Pinto, J.C., Morais, A.I. et al. The heteroskedasticity-consistent covariance estimator in accounting. Rev Quant Finan Acc 37, 427–449 (2011). https://doi.org/10.1007/s11156-010-0212-1
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DOI: https://doi.org/10.1007/s11156-010-0212-1