Endogeneity in Empirical Corporate Finance

Abstract

This chapter discusses how applied researchers in corporate finance can address endogeneity concerns. We begin by reviewing the sources of endogeneity - omitted variables, simultaneity, and measurement error - and their implications for inference. We then discuss in detail a number of econometric techniques aimed at addressing endogeneity problems including: instrumental variables, difference-in-differences estimators, regression discontinuity design, matching methods, panel data methods, and higher order moments estimators. The unifying themes of our discussion are the emphasis on intuition and the applications to corporate finance.

Keywords: Instrumental Variables, Difference-in-Differences Estimators,Regression Discontinuity Designs, Matching Estimators, Measurement Error

JEL Classification: G3, C21, C23, C26