Double-Entry Constraint, Structural Modeling and Econometric Estimation

The key proposition of the paper lies in the treatment of financial statements as a matrix of endogenous information codetermined by double entry. To account for the highly structured information set in econometric estimation, we develop a generalised structural system for use with accounting variables, within which the deterministic relationships governing financial statement articulation are clearly defined. The framework is used to formulate fully identified models that are consistent with the underlying duality that characterises the generating process of accounting data. To demonstrate the efficacy of the approach, we consider the model of equity pricing in Penman and Yehuda (2009), and the model of investment sensitivity to operating cash flow in Fazzari, Hubbart and Petersen (1988) and Kaplan and Zingales (1997). By comparison with the more traditional estimation methods, the structural system is shown to yield estimates with increased precision that adhere to double entry rules