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Correcting for Self-Selection Based Endogeneity in Management Research: A Review and Empirical Demonstration

Author

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  • Joseph Clougherty
  • Tomaso Duso
Abstract
Foundational to the discipline of management is the idea that organizational decisions are a function of expected outcomes; hence, the customary empirical approach to employ multivariate techniques that regress performance outcome variables on discrete measures of organizational choices (e.g., investments, trainings, strategies and other managerial decision variables) potentially suffer from self-selection based endogeneity bias. Selectioneffects represent an internal validity threat as they can lead to biased parameters that render erroneous empirical results and incorrect conclusions with regard to the veracity of theoretical assertions. Our review of the empirical literature suggests that the issue of selection-effects has received increasing attention in management; yet, the techniques to correct for selection-effects have not always been employed in the proper manner, thus estimations often suffer from design shortcomings that potentially render flawed empirical findings. We explain the nature of self-selection based endogeneity bias and review the techniques available to researchers in management to correct for selection-effects when organizational decisions are discrete in nature. Employing data on M&A investment decisions and rival-firm value reactions, we provide empirical examples that demonstrate the tradeoffs involved with the alternative techniques.

Suggested Citation

  • Joseph Clougherty & Tomaso Duso, 2015. "Correcting for Self-Selection Based Endogeneity in Management Research: A Review and Empirical Demonstration," Discussion Papers of DIW Berlin 1465, DIW Berlin, German Institute for Economic Research.
    • Handle: RePEc:diw:diwwpp:dp1465
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    References listed on IDEAS

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    9. Martin Falk, 2015. "Returns to investments in new ski lifts: the importance of weather conditions and elevation," ERSA conference papers ersa15p1379, European Regional Science Association.
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    More about this item

    Keywords

    Endogenous treatment; event-study; Heckman; mergers; rival firms; Switching regressions model;
    All these keywords.

    JEL classification:

    • M1 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration
    • M2 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General

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