On the Use of Instrumental Variables in Accounting Research
Posted: 14 Nov 2009
There are 2 versions of this paper
On the Use of Instrumental Variables in Accounting Research
Date Written: November 12, 2009
Abstract
Instrumental variable (IV) methods are commonly used in accounting research (e.g., earnings management, corporate governance, executive compensation, and disclosure research) when the regressor variables are endogenous. While IV estimation is the standard textbook solution to mitigating endogeneity problems, the appropriateness of IV methods in typical accounting research settings is not obvious. Drawing on recent advances in statistics and econometrics, we identify conditions under which IV methods are preferred to OLS estimates and propose a series of tests for research studies employing IV methods. We illustrate these ideas by examining the relation between corporate disclosure and the cost of capital.
Keywords: Endogeneity, instrumental variables, disclosure, cost of capital
JEL Classification: C30, G30, M41, M43
Suggested Citation: Suggested Citation