Below are the results of an association study conducted by Saha, Morris and Kang (2019):Adjusted R2 = 0.689 Which of the following is incorrect?

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The question presents four statements about the association study results from Saha, Morris and Kang (2019) with an Adjusted R2 of 0.689. This means the model with book value of equity (BVE) and earnings per share in 2012 (EPS2012) explains about 68.9% of the variation in stock price.

Option A: 'There is a linear relationship between book value of equity and stock price, holding EPS constant.' This is supported by the regression framework: BVE is an independent predictor in the model, and the table shows a nonzero unstandardized coefficient for BVE with a statistically significant t-value, indicating a linear relationship when EPS is held fixed.

Option B: 'There is a linear relationship between EPS and stock price, holding book value of equity constant.' Similarly, EPS2012 has its own coefficient and a significant t-statistic in the regression, indicating a linear relationship with stock price when BVE is held constant.

Option C: 'Compared to EPS, book value of equity has a larger impact on stock price.' Looking at the unstandardized coefficients and their t-values, BVE has a larger coefficient magnitude and a much larger t-statistic (BVE: t around 10.914; EPS: t around 7.066) than EPS, suggesting a stronger immediate association for BVE relative to EPS when both are included in the model.

Option D: 'Book value of equity and EPS collectively explain nearly half of the variation in stock price.' While the two predictors do explain a substantial portion of variation, the reported Adjusted R2 is 0.689, i.e., about 68.9% of the variation is explained, not 'nearly half' (roughly 50%). This makes the statement imprecise and incorrect given the actual metric provided.

In summary, A and B align with the presence of significant linear relationships for each predictor when controlling the other, C is consistent with BVE having the larger impact based on coefficients and t-values, and D is inaccurate because 68.9% is not 'nearly half' of the variation. The incorrect statement is D.

ACCT3563-Issues in Financial Reporting and Analysis - Term 3, 2025

Below are the results of an association study conducted by Saha, Morris and Kang (2019):Adjusted R2 = 0.689 Which of the following is incorrect?

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