On the use of instrumental variables in accounting research

David F. Larcker, Tjomme O. Rusticus

Research output: Contribution to journalArticle

731 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)186-205
Number of pages20
JournalJournal of Accounting and Economics
Volume49
Issue number3
DOIs
StatePublished - Apr 1 2010

Keywords

  • Cost of capital
  • Disclosure
  • Endogeneity
  • Instrumental variables

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