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Some Non-Linear Problems in Accounting and Finance: Can we Apply Regression?

John Ogwang

John Ogwang 1


  1. Department of Business Management, Faculty of Management Sciences, Lira University, Uganda. 1

on Google Scholar
on PubMed

Pages: 81-99

DOI: 10.18488/journal.62.2021.82.81.99

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Article History:

Received: 08 April, 2020
Revised: 04 June, 2020
Accepted: 16 November, 2020
Published: 01 December, 2020


Abstract:

Recent studies have indicated that many decision problems in accounting and finance can be better modeled by non-linear models in practice. However, existing literatures have also shown that managers and decision makers are not very conversant with non-linear models as compared to linear models because of the simplicity of linear models. In this paper, attempts are made to transform some non-linear models in accounting and finance which conform to exponential and power functions to their equivalent linear forms. The resulting equivalent linear models are subjected to regression analysis. The paper documents interesting practical non-linear problems in accounting and finance where it is possible to apply regression, and provides technical interpretations of coefficients of resulting regression equations. Some non-linear problems which have been documented in this analysis include; depreciation of non-current assets, the learning curve model, life cycle costing, compounding, discounting and exponential growth bias. Although logarithmic transformation of non- linear functions is not a novel idea in literature of accounting and finance, there is no evidence in literature that scholars have proposed particular cases in finance and accounting where these linear transformations and their resulting regression equations would yield meaningful results that can enhance management decision making. This paper fills this gap by documenting practical non-linear problems in finance and accounting where linearization and subsequent application of regression analysis generates useful results for management decision making purposes.
Contribution/ Originality
In the literature of accounting and finance specifically; firstly, this paper originates new formulae for some non-linear problems. Secondly, it’s among very few papers which examined regression of non-linear problems. Thirdly, this is the first paper to document practical cases where regression of log transformed variables generates useful results.

Keywords:

Linearity, Non-linear models, Logarithmic transformations, Regression, Finance, Accounting.

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Funding:

This study received no specific financial support.

Competing Interests:

The author declares that there are no conflicts of interests regarding the publication of this paper.

Acknowledgement:


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