Dealing with endogeneity bias: The generalized method of moments (GMM) for panel data

Subhan Ullah*, Pervaiz Akhtar, Ghasem Zaefarian

*Corresponding author for this work

Research output: Contribution to journalArticle

46 Citations (Scopus)

Abstract

Endogeneity bias can lead to inconsistent estimates and incorrect inferences, which may provide misleading conclusions and inappropriate theoretical interpretations. Sometimes, such bias can even lead to coefficients having the wrong sign. Although this is a long-standing issue, it is now emerging in marketing and management science, with high-ranked journals increasingly exploring the issue. In this paper, we methodologically demonstrate how to detect and deal with endogeneity issues in panel data. For illustration purposes, we used a dataset consisting of observations over a 15-year period (i.e., 2002 to 2016) from 101 UK listed companies and examined the direct effect of R&D expenditures, corporate governance, and firms’ characteristics on performance. Due to endogeneity bias, the result of our analyses indicates significant differences in findings reported under the ordinary least square (OLS) approach, fixed effects and the generalized method of moments (GMM) estimations. We also provide generic STATA commands that can be utilized by marketing researchers in implementing a GMM model that better controls for the three sources of endogeneity, namely, unobserved heterogeneity, simultaneity and dynamic endogeneity.

Original languageEnglish
Pages (from-to)69-78
Number of pages10
JournalIndustrial Marketing Management
Volume71
Early online date10 Jan 2018
DOIs
Publication statusPublished - May 2018

Keywords

  • Endogeneity bias
  • Generalized method of moments
  • Methodological issues
  • Panel data

ASJC Scopus subject areas

  • Marketing

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