Research Notes and Commentaries
The perils of endogeneity and instrumental variables in strategy research: Understanding through simulations
Article first published online: 25 JUN 2013
Copyright © 2013 John Wiley & Sons, Ltd.
Strategic Management Journal
How to Cite
Semadeni, M., Withers, M. C. and Trevis Certo, S. (2013), The perils of endogeneity and instrumental variables in strategy research: Understanding through simulations. Strat. Mgmt. J.. doi: 10.1002/smj.2136
- Article first published online: 25 JUN 2013
- Accepted manuscript online: 18 APR 2013 05:50AM EST
- Manuscript Accepted: 11 MAR 2013
- Manuscript Revised: 19 FEB 2013
- Manuscript Received: 5 SEP 2012
- instrumental variables;
- ordinary least squares;
- strategy research
In this paper we use simulations to examine how endogeneity biases the results reported by ordinary least squares (OLS) regression. In addition, we examine how instrumental variable techniques help to alleviate such bias. Our results demonstrate severe bias even at low levels of endogeneity. Our results also illustrate how instrumental variables produce unbiased coefficient estimates, but instrumental variables are associated with extremely low levels of statistical power. Finally, our simulations highlight how stronger instruments improve statistical power and that endogenous instruments can report results that are inferior to those reported by OLS regression. Based on our results, we provide a series of recommendations for scholars dealing with endogeneity. Copyright © 2013 John Wiley & Sons, Ltd.