Simple linear regression models

This chapter discusses uses and limitations of simple linear regression models and estimation of a linear relation between two variables. It describes assumptions under which the least squares method produces unbiased, consistent and efficient estimators and linearity in parameters vs. in variables. The chapter shows that an individual consumption is not necessarily equal to the conditional average corresponding to its income level. In other words, even when households have the same level of income, their consumption could be different. The extent to which stocks move together depends on the relative amount of market-level and firm-level information capitalized into stock prices. One widely used measure of the stock price synchronicity is the coefficient of determination from the following linear regression. Dechow compares the ability of earnings relative to net cash flows and cash from operations to reflect firm performance. Net cash flows have no accrual adjustments and are hypothesized to suffer severely from timing and matching problems.