Endogenous problems in cross-sectional valuation models based on accounting information

Resumen:
The main purpose of this paper is to deal with the analysis of the scale effect in the value-relevance of accounting numbers. We examine the impacts of widely used deflators on the adjustment of scale effect. We find that most of the usual deflators employed in the literature generate endogeneity problems. In this paper we recommend the use of exogenous deflator such as the number of employees in market-based accounting research models. This alternative deflator produces, at least for the USA and Canada data, slightly better statistical results than other (endogenous) deflators such as the market value, the book value of equity, or the total assets.