Correcting for Self-Selection Based Endogeneity in Management Research: A Review and Empirical Demonstration

59 Pages Posted: 8 Apr 2015

See all articles by Joseph A. Clougherty

Joseph A. Clougherty

University of Illinois at Urbana-Champaign

Tomaso Duso

German Institute for Economic Research (DIW Berlin); TU Berlin- Faculty of Economics and Management - Empirical Industrial Organization

Date Written: March 2015

Abstract

Foundational to the discipline of management is the idea that organizational decisions are a function of expected outcomes; hence, the customary empirical approach to employ multivariate techniques that regress performance outcome variables on discrete measures of organizational choices (e.g., investments, trainings, strategies and other managerial decision variables) potentially suffer from self-selection based endogeneity bias. Selectioneffects represent an internal validity threat as they can lead to biased parameters that render erroneous empirical results and incorrect conclusions with regard to the veracity of theoretical assertions. Our review of the empirical literature suggests that the issue of selection-effects has received increasing attention in management; yet, the techniques to correct for selection-effects have not always been employed in the proper manner, thus estimations often suffer from design shortcomings that potentially render flawed empirical findings. We explain the nature of self-selection based endogeneity bias and review the techniques available to researchers in management to correct for selection-effects when organizational decisions are discrete in nature. Employing data on M&A investment decisions and rival-firm value reactions, we provide empirical examples that demonstrate the tradeoffs involved with the alternative techniques.

Keywords: Endogenous treatment, event-study, Heckman, mergers, rival firms, Switching regressions model

JEL Classification: M01, M02, C01

Suggested Citation

Clougherty, Joseph A. and Duso, Tomaso, Correcting for Self-Selection Based Endogeneity in Management Research: A Review and Empirical Demonstration (March 2015). DIW Berlin Discussion Paper No. 1465. Available at SSRN: https://ssrn.com/abstract=2591394 or http://dx.doi.org/10.2139/ssrn.2591394

Joseph A. Clougherty (Contact Author)

University of Illinois at Urbana-Champaign ( email )

1206 S. Sixth Street
350 Wohlers Hall, MC-706
Champaign, IL 61820
United States

Tomaso Duso

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

TU Berlin- Faculty of Economics and Management - Empirical Industrial Organization ( email )

Berlin, 10585
Germany

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