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Endogeneity in Empirical Corporate Finance

Michael R. Roberts

University of Pennsylvania - Finance Department

Toni M. Whited

University of Rochester - Simon Graduate School of Business

August 30, 2011

Simon School Working Paper No. FR 11-29

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.
Number of Pages in PDF File: 98