Abstract

http://ssrn.com/abstract=694824
 
 

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On the Use of Instrumental Variables in Accounting Research


David F. Larcker


Stanford University - Graduate School of Business

Tjomme O. Rusticus


London Business School

May 16, 2008


Abstract:     
Instrumental variable (IV) methods are commonly used in accounting research (e.g., earnings management, corporate governance, executive compensation, and disclosure research) when the regressor variables are endogenous. While IV estimation is the standard textbook solution to mitigating endogeneity problems, the appropriateness of IV methods in typical accounting research settings is not obvious. Drawing on recent advances in statistics and econometrics, we identify conditions under which IV methods are preferred to OLS estimates and propose a series of tests for research studies employing IV methods. We illustrate these ideas by examining the relation between corporate disclosure and the cost of capital.

Number of Pages in PDF File: 63

Keywords: Endogeneity, instrumental variables, disclosure, cost of capital

JEL Classification: C30, G30, M41, M43


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Date posted: April 7, 2005 ; Last revised: November 13, 2009

Suggested Citation

Larcker, David F. and Rusticus, Tjomme O., On the Use of Instrumental Variables in Accounting Research (May 16, 2008). Available at SSRN: http://ssrn.com/abstract=694824 or http://dx.doi.org/10.2139/ssrn.694824

Contact Information

David F. Larcker
Stanford University - Graduate School of Business ( email )
Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Tjomme O. Rusticus (Contact Author)
London Business School ( email )
Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom
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