Scale and Scale Effects in Market-Based Accounting Research

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 quot;scale effectquot;. Firms with large price per share (and large quot;per sharequot; 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 per share) and the financial statement variables