It is well documented that losses are less persistent than profits and that stock prices anticipate the lower persistence of losses. Yet the underlying explanation for these results is unclear. One explanation lies in the abandonment option, whereby firms with losses are more likely to curtail...

This paper illustrates how measurement error (“ME”) in dependent variables not only reduces power but, under common conditions in accounting and finance studies, can lead to statistical biases and erroneous inferences. These confounds exist because ME in accounting-based proxies is typically...