Hierarchical Bayesian models in accounting: A tutorial -- Online appendix to Monograph
By BullipeReddy Chintha, Sanjay Kallapur
January 2023
DOI
www.github.com/skallapur/aaa_monograph
Citation
Chintha, BullipeReddy., Kallapur, Sanjay. (2023). Hierarchical Bayesian models in accounting: A tutorial -- Online appendix to Monograph www.github.com/skallapur/aaa_monograph.
Copyright
2023
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Abstract
Accounting parameters such as earnings response coefficients (ERC) are generally heterogeneous across firms. When panel data is available, the parameters are typically estimated using OLS with either pooled data which ignores parameter heterogeneity, or using firm-specific observations which tends to give noisy estimates. An alternative is to use Bayesian hierarchical models which preserve parameter heterogeneity but have the advantage of being less noisy than firm-specific OLS. Their advantage stems from the use of data about all other firms to form an informative prior about each firm’s parameter. In this paper, using a sample of 301 firms we compare the results from three Bayesian hierarchical models to OLS-based ERCs. Our results show that the Bayesian models produce ERCs that reduce the number of negative ERCs from 48 to 6 and lower mean squared error in a hold-out sample by more than 90%. We show the formulation and estimation of these models step by step, with a discussion of the Stata commands involved. The Stata as well as R code is available online. We conclude by discussing the potential for such models to be applied to other contexts in accounting research.

Sanjay Kallapur is a Professor of Accounting at the Indian School of Business (ISB). He joined ISB in 2005 from the Krannert School of Management, Purdue University, where he was a tenured Associate Professor.

Professor Kallapur conducts research on financial and managerial accounting, auditing, corporate governance, and risk management. He has published in each of the top three accounting journals, and his papers have been cited over 4,000 times (Google Scholar) and in regulatory policy documents in India and the UK. The American Accounting Association recently published his monograph on scientific inference in accounting research, beyond the use of p-values.

He is the founding Editor-in-Chief of Accounting Theory and Practice, a research journal focusing on India, published by Elsevier. He has been an editor of The Accounting Review from 2008 to 2011, the first person from outside North America to be appointed to that position.

Professor Kallapur is a member of National Financial Reporting Authority (NFRA), the regulatory body overseeing the accounting and auditing of listed companies in India. He is an independent director on the Board of IDBI Bank, where he serves on the risk management and audit committees. He previously served on the Board of the Life Insurance Corporation of India.

Professor Kallapur has held positions as Associate Dean and Deputy Dean for almost a decade at ISB. He started the PhD-equivalent Fellow Programme in Management at ISB and has placed his students in faculty positions at the London School of Economics, IESEG Paris, Aalto University, University of Queensland, University of Western Australia, and IIM Udaipur.

Professor Kallapur has a PhD in Business Economics from Harvard Business School, and B.Com. and M.M.S. degrees from Mumbai University. He is professionally qualified as a Fellow Member of the Institute of Cost Accountants of India (FCMA).

Sanjay Kallapur
Sanjay Kallapur