Author: Hecht, Jason

Source: Applied Financial Economics, Volume 18, Number 18, October 2008 , pp. 1501-1513(13)

Publisher: Routledge, part of the Taylor & Francis Group

Abstract:

Employing seemingly unrelated regression (SUR) models with panel corrected standard errors (PCSE) this research augments and extends Fama and French's (2000) 'first stage' model of expected cross-sectional profitability. Capital intensity, defined as the ratio of depreciation plus interest expense to total assets was found to be significantly inversely related to profitability. In addition, specific market sector and country fixed-effects proved significant in models that simultaneously corrected for cross-sectional heteroscedasticity and cross-equation residual correlation. Both of these corrections addressed the potential bias from least squares standard errors or 'inference problem' noted in the previous work by Fama and French. Unrestricted and restricted SUR cross-sectional models with PCSE are used to compute t-statistics based on Fama-MacBeth, Litzenberger-Ramaswamy and standard panel methodologies. The former two methods provided significant results compared to those using the Fama-MacBeth approach.

Document Type: Research article

DOI: http://dx.doi.org/10.1080/09603100701735938

Affiliations: 1: Anisfield School of Business, Ramapo College of New Jersey, Mahwah, New Jersey 07430-1680, USA

Publication date: 2008-10-01

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