Endogeneity and Empirical Accounting Research

Posted: 24 May 2007

See all articles by David F. Larcker

David F. Larcker

Stanford University - Graduate School of Business; European Corporate Governance Institute (ECGI); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

Tjomme O. Rusticus

Hong Kong Polytechnic University - School of Accounting and Finance

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)

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )

Crown Quadrangle 559 Nathan Ab
Stanford, CA 94305-8610
United States

Tjomme O. Rusticus (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

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