Use of R-2 in accounting research: measuring changes in value relevance over the last four decades

Accounting research frequently uses R-2, for example, to measure value rele vance. We show analytically that scale effects present in levels regression s increase R-2, and this effect increases in the scale factor's coefficient of variation. Thus, between-sample comparisons of R-2 are invalid, unless one controls for differences in the scale factor's coefficient of variation . Applying our analysis to prior research, we show that the documented incr ease in value relevance of accounting is attributable to increases in the c oefficient of variation of the scale factor. Controlling for this effect, t here has been a decline in value relevance, as measured by R-2. (C) 1999 El sevier Science B.V. All rights reserved.