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Endogeneity and Empirical Accounting Research


  • David F. Larcker
  • Tjomme O. Rusticus


The discussion reinforces and expands on some of the fundamental issues about endogeneity raised by Chenhall and Moers (European Accounting Review, this issue, 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.

Suggested Citation

  • David F. Larcker & Tjomme O. Rusticus, 2007. "Endogeneity and Empirical Accounting Research," European Accounting Review, Taylor & Francis Journals, vol. 16(1), pages 207-215.
  • Handle: RePEc:taf:euract:v:16:y:2007:i:1:p:207-215 DOI: 10.1080/09638180701269905

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    References listed on IDEAS

    1. Ackert, Lucy F. & Tian, Yisong S., 2001. "Efficiency in index options markets and trading in stock baskets," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1607-1634, September.
    2. Shlomo Benartzi & Richard H. Thaler, 1995. "Myopic Loss Aversion and the Equity Premium Puzzle," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 73-92.
    3. Tian, Yisong S., 2004. "Too much of a good incentive? The case of executive stock options," Journal of Banking & Finance, Elsevier, vol. 28(6), pages 1225-1245, June.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
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    Cited by:

    1. Bremert, Michael & Schulten, Axel, 2008. "The impact of supervisory board characteristics on form performance," Papers 08-33, Sonderforschungsbreich 504.
    2. Butler, Maureen G. & Callahan, Carolyn M., 2014. "Human resource outsourcing: Market and operating performance effects of administrative HR functions," Journal of Business Research, Elsevier, vol. 67(2), pages 218-224.
    3. Chaur-Shiuh Young & Liu-Ching Tsai & Pei-Gin Hsieh, 2008. "Voluntary Appointment of Independent Directors in Taiwan: Motives and Consequences," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 35(9-10), pages 1103-1137.
    4. Gregory Waymire & Sudipta Basu, 2011. "Economic crisis and accounting evolution," Accounting and Business Research, Taylor & Francis Journals, vol. 41(3), pages 207-232, August.
    5. David Hillier & Patrick McColgan, 2009. "Firm Performance and Managerial Succession in Family Managed Firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 461-484.
    6. Gassen, Joachim, 2014. "Causal inference in empirical archival financial accounting research," Accounting, Organizations and Society, Elsevier, vol. 39(7), pages 535-544.
    7. repec:spr:jbecon:v:88:y:2018:i:2:d:10.1007_s11573-017-0873-5 is not listed on IDEAS
    8. Jennifer Gippel & Tom Smith & Yushu Zhu, 2015. "Endogeneity in Accounting and Finance Research: Natural Experiments as a State-of-the-Art Solution," Abacus, Accounting Foundation, University of Sydney, vol. 51(2), pages 143-168, June.
    9. King, Robyn & Clarkson, Peter, 2015. "Management control system design, ownership, and performance in professional service organisations," Accounting, Organizations and Society, Elsevier, vol. 45(C), pages 24-39.
    10. Michael Firth & Sonia Wong & Yong Yang, 2014. "The double-edged sword of CEO/chairperson duality in corporatized state-owned firms: evidence from top management turnover in China," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 18(1), pages 207-244, February.

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