Journal article

Correcting for Cross-Sectional and Time-Series Dependence in Accounting Research

Ian D Gow, Gaizka Ormazabal, Daniel J Taylor

ACCOUNTING REVIEW | AMER ACCOUNTING ASSOC | Published : 2010

Abstract

We review and evaluate the methods commonly used in the accounting literature to correct for cross-sectional and time-series dependence. While much of the accounting literature studies settings in which variables are cross-sectlonally and serially correlated, we find that the extant methods are not robust to both forms of dependence. Contrary to claims in the literature, we find that the Z2 statistic and NeweyWest corrected Fama-MacBeth standard errors do not correct for both cross-sectional and time-series dependence. We show that extant methods produce misspecified test statistics in common accounting research settings, and that correcting for both forms of dependence substantially alters ..

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University of Melbourne Researchers