Endogeneity in Accounting and Finance Research: Natural Experiments as a State-of-the-Art Solution
28 Pages Posted: 20 Oct 2014
Date Written: October 20, 2014
This paper provides a discussion of endogeneity as it relates to finance and accounting research. We discuss the text book solutions: two stage least squares, instrumental variables, differenced GMM and System GMM and provide a unifying framework showing how they are related. We consider the limitations of these techniques and then detail a state-of-the-art solution — utilizing a natural experiment as a way of mitigating endogeneity and building stronger theory.
Keywords: Corporate governance, endogeneity, natural or quasi experiment
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