Estimating earnings response coefficients: Pooled versus firm-specific models

Short-window earnings response coefficients estimated from pooled time-series cross-sectional regressions are systematically smaller than corresponding averages of firm-specific coefficients estimated from time-series regressions. The cause is a negative relation between firm-specific earnings response coefficients and unexpected earnings variances. If the hypotheses of equality of firm-specific coefficients and equality of firm-specific unexpected earnings variances are rejected, firm-specific estimation should be used instead of pooled estimation. Using pooled estimation may lead to incorrect inferences about the magnitude of estimated coefficients and/or incorrect inferences about differences in coefficient behavior between groups of firms.