Handbook of the Economics of Finance

Chapter 7

Endogeneity in Empirical Corporate Finance¹

Michael R. Roberts^a and Toni M. Whited^b

^aFinance Department, The Wharton School, University of Pennsylvania and NBER, Philadelphia, PA 19104-6367, USA

^bSimon Graduate School of Business, University of Rochester, Rochester, NY 14627, USA, [e-mail]

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 ...