On the use of instrument variables in accounting research
Journal
Journal of Accounting and Economics
Subject
Accounting
Publishing details
Publication Year
2010
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
Available on ECCH
No
