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Endogeneity in Empirical Corporate Finance

97 Pages Posted: 28 Jan 2011 Last revised: 6 Oct 2012

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: OCtober 5, 2012

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

Suggested Citation

Roberts, Michael R. and Whited, Toni M., Endogeneity in Empirical Corporate Finance (OCtober 5, 2012). Simon School Working Paper No. FR 11-29. Available at SSRN: https://ssrn.com/abstract=1748604 or http://dx.doi.org/10.2139/ssrn.1748604

Michael R. Roberts (Contact Author)

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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