ABSTRACT

In this chapter we discuss the different methods for risk control that are used in accounting-based research, focusing on particular implementation issues and the associated limitations of these methods in the context of (i) markets with small amounts of data relative to that found in the USA, (ii) markets which are relatively unexplored in identifying firm characteristics that explain the cross-section of firm expected returns, or (iii) both. Given that to fully discuss such implementation issues an illustration is useful, we use UK market and accounting data for this purpose. Nonetheless, any general conclusions we reach are potentially applicable to other markets and, indeed, to the USA.