Propensity Score Matching in Accounting Research and Rosenbaum Bounds Analysis for Confounding Variables

59 Pages Posted: 13 Oct 2009 Last revised: 6 Jul 2012

See all articles by Michael J. Peel

Michael J. Peel

Cardiff University - Cardiff Business School

Gerry Makepeace

Cardiff University; IZA Institute of Labor Economics

Date Written: October 8, 2009

Abstract

Propensity score (PS) matching is becoming an increasingly popular method of estimating treatment effects. However, a major limitation relative to two-step Heckman procedures is that it does not control for potential unobserved selection bias. This paper employs a new method - Rosenbaum bounds - which enables researchers to assess the robustness of their PS matched estimates against the effects of potential unobserved ‘confounding’ variables. We provide an evaluation of PS matching and a comprehensive exposition of the Rosenbaum method and illustrate its properties and parameters with reference to auditor premiums for the standard dichotomy of big 4 versus non-big 4 auditors, together with new evidence relating to big 4 versus the next four largest (mid-tier) auditors, and the latter versus smaller auditors. Inter alia, our findings indicate that hidden bias would have to be large and influential in order to account for the big 4 premium generally, but only a comparatively small confounding unobserved covariate is required to negate the premium relative to leading mid-tier auditors. The Rosenbaum method also provided consistent estimates when covariates were omitted which were known ex ante to have either a large or small impact on the outcome. We conclude that the Rosenbaum technique provides researchers with a valuable tool to assess the sensitivity of causal inferences under bounded uncertainty and one which makes explicit the degree of hidden bias required to neutralise treatment effects estimated with the method of PS matching.

An extended version of this paper, including simultaneous multi-sample PSM and quantile regression estimates, was published in Journal of Business Finance & Accounting, 39(5) & (6), 2012; entitled: Differential Audit Quality, Propensity Score Matching and Rosenbaum Bounds for Confounding Variables.

Keywords: Rosenbaum bounds, propensity score matching, hidden bias, treatment effects, auditor premiums

JEL Classification: C14, C21, M41, M47, M49

Suggested Citation

Peel, Michael J. and Makepeace, Gerald H, Propensity Score Matching in Accounting Research and Rosenbaum Bounds Analysis for Confounding Variables (October 8, 2009). Available at SSRN: https://ssrn.com/abstract=1485734 or http://dx.doi.org/10.2139/ssrn.1485734

Michael J. Peel (Contact Author)

Cardiff University - Cardiff Business School ( email )

Cardiff
United Kingdom

Gerald H Makepeace

Cardiff University ( email )

Economics Section
Cardiff Business School
Cardiff, Wales CF10 3EU
United Kingdom

IZA Institute of Labor Economics

Schaumburg-Lippe-Str. 7 / 9
Bonn, D-53072
Germany

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
942
Abstract Views
3,547
rank
27,153
PlumX Metrics