Endogeneity and Empirical Accounting Research

Posted: 24 May 2007  

David F. Larcker

Stanford University - Graduate School of Business

Tjomme O. Rusticus

University of Minnesota

Abstract

The discussion reinforces and expands on some of the fundamental issues about endogeneity raised by Chenhall and Moers (European Accounting Review, 2007, pp. 173-195). We focus on the econometric problems researchers encounter when investigating the performance effects of some endogenous firm choice. Our points are illustrated using the classic research question about the relation between managerial equity ownership and firm value. We consider cases where ownership is treated as an exogenous, endogenous and 'partially' endogenous variable. We argue treating ownership as an exogenous variable is seriously flawed. Unfortunately, when ownership is at least partially endogenous, it is necessary for empirical researchers to identify exogenous variables that are the determinants of the ownership choice. This calls for better theory to guide the empirical work.

Keywords: Endogeneity, instrumental variables, managerial ownership

JEL Classification: C30, G30, M40

Suggested Citation

Larcker, David F. and Rusticus, Tjomme O., Endogeneity and Empirical Accounting Research. European Accounting Review, Vol. 16, No. 1, pp. 207-215, May 2007. Available at SSRN: https://ssrn.com/abstract=988561

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
518 Memorial Way
Stanford, CA 94305-5015
United States
650-725-6159 (Phone)

Tjomme O. Rusticus (Contact Author)

University of Minnesota ( email )

Carlson School of Management
321 19th Avenue South, Room 3-122
Minneapolis, MN 55455
United States

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