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Handbook of the Economics of Finance by Rene M. Stulz, Milton Harris, George M. Constantinides

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Chapter 7

Endogeneity in Empirical Corporate Finance1

Michael R. Robertsa and Toni M. Whitedb

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, mrrobert@wharton.upenn.edu

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 ...

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