Endogeneity and Empirical Accounting Research
David F. Larcker
Stanford University - Graduate School of Business
Tjomme O. Rusticus
London Business School; Northwestern University - Kellogg School of Management
European Accounting Review, Vol. 16, No. 1, pp. 207-215, May 2007
The discussion reinforces and expands on some of the fundamental issues about endogeneity raised by Chenhall and Moers (European Accounting Review, 2007, pp. 173-195). We focus on the econometric problems researchers encounter when investigating the performance effects of some endogenous firm choice. Our points are illustrated using the classic research question about the relation between managerial equity ownership and firm value. We consider cases where ownership is treated as an exogenous, endogenous and 'partially' endogenous variable. We argue treating ownership as an exogenous variable is seriously flawed. Unfortunately, when ownership is at least partially endogenous, it is necessary for empirical researchers to identify exogenous variables that are the determinants of the ownership choice. This calls for better theory to guide the empirical work.
Keywords: Endogeneity, instrumental variables, managerial ownership
JEL Classification: C30, G30, M40
Date posted: May 24, 2007
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