Distortion effects and extreme observations in empirical research: an analysis of the incremental information content of cash flows

Article Abstract:

Linear regression models are used in a number of studies examining the presence or absence of incremental information content in cash flows. The results of these studies are not consistent. This paper provides evidence of the impact that extreme observations can exert on parameter estimates in a regression model. Two techniques commonly used to address the problem of extreme observations are considered. These techniques, winsorising the data and trimming the data, are compared to a regression diagnostic technique, Cook's distance. The comparison of these techniques provides evidence that the choice of technique can determine the significance or otherwise of regression results. This paper concludes that the inconsistency in reported results examining the incremental information content in cash flows may be attributed to the techniques adopted to address the issue of extreme observations. (Reprinted by permission of the publisher.)

Cash flow, Regression analysis

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The investment opportunity set and capitalization versus expensing methods of accounting choice

Article Abstract:

The effects of the investment opportunity set on management's decision to capitalize or expense significant costs in two different settings were examined. These were in accounting for exploration and development costs by oil-and-gas firms and in accounting for research and development costs by firms in different industries prior to 1974. The results showed that high-growth firms were more likely than low-growth companies to select the capitalization method of accounting for expenses.

Accounting and auditing, Growth industries

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