Endogeneity in Corporate Finance Empirical Research (In Portuguese)

32 Pages Posted: 23 Apr 2010

See all articles by Lucas Ayres B. de C. Barros

Lucas Ayres B. de C. Barros

University of Sao Paulo

F. Henrique Castro

Universidade de São Paulo

Alexandre Di Miceli da Silveira

Alvares Penteado School of Business (Fecap)

Daniel Reed Bergmann

Mackenzie Presbyterian University

Date Written: April 20, 2010

Abstract

This paper offers solutions to mitigate the problems associated with the endogeneity issues of explanatory variables faced by corporate finance researchers who analyze observational data via regression methods. Such problems may bias the causality inferences between variables, a fundamental goal in virtually all empirical works on corporate finance.

We identify the main methodological challenges faced by empirical researchers, as well as the main regression methods available in order to reduce the possibility of drawing incorrect causality inferences. Then, we develop and implement an original simulation model that reproduces the main characteristics of the observational data employed in most corporate finance researches.

As the main result, the computational experiments evidence that the most usually employed regression methods in corporate finance are generally inadequate and can lead to substantial incorrect inferences. On the other hand, they point to estimators based on Generalized Method of Moments applied to panel data as effective and feasible ways to eliminate or at least mitigate the endogeneity problems usually found in this line of research. The general implication is that both theoretical and simulation analyses lead to a questioning of the results of previous works on corporate finance, particularly the ones who solely employ ordinary least squares and fixed or random effects as a way for drawing causality inferences.

Note: Downloadable document is in Portuguese.

Keywords: Endogeneity, simulation, corporate finance, GMM

JEL Classification: C23, C63, G30

Suggested Citation

Barros, Lucas Ayres Barreira de Campos and Figueiredo de Castro Junior, Francisco Henrique and Di Miceli da Silveira, Alexandre and Bergmann, Daniel Reed, Endogeneity in Corporate Finance Empirical Research (In Portuguese) (April 20, 2010). Available at SSRN: https://ssrn.com/abstract=1593187 or http://dx.doi.org/10.2139/ssrn.1593187

Lucas Ayres Barreira de Campos Barros

University of Sao Paulo ( email )

Avenida Professor Luciano Gualberto, 908
São Paulo, São Paulo 05508-010
Brazil

Francisco Henrique Figueiredo de Castro Junior (Contact Author)

Universidade de São Paulo ( email )

Av. Luciano Gualberto, 908
FEA 3
São Paulo, São Paulo 05508-900
Brazil

HOME PAGE: http://www.fea.usp.br

Alexandre Di Miceli da Silveira

Alvares Penteado School of Business (Fecap) ( email )

Av. Liberdade, 532
Liberdade
São Paulo
Brazil
+5511945909031 (Phone)

HOME PAGE: http://lattes.cnpq.br/4773608871754250

Daniel Reed Bergmann

Mackenzie Presbyterian University ( email )

Rua da Consolação 920
São Paulo, 010302907
Brazil

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