Correcting for Endogeneity in Strategic Management Research

TLDR

Strategic management assumes that managers’ decisions are endogenous to expected performance, yet extensions addressing endogeneity are rarely discussed in the literature. The paper aims to describe the endogeneity problem in cross‑sectional and panel strategic management data, focusing on managers’ choice among discrete strategies with continuous performance outcomes. The authors present readily implementable econometric methods to correct for endogeneity, provide STATA code, and discuss extensions and nuances of these models. A review of more than a decade of Strategic Management Journal articles reveals that few papers econometrically correct for endogeneity.

Abstract

The field of strategic management is predicated fundamentally on the idea that managements' decisions are endogenous to their expected performance implications. Yet, based on a review of more than a decade of empirical research in the Strategic Management Journal, we find that few papers econometrically correct for such endogeneity. In response, we now describe the endogeneity problem for cross-sectional and panel data, referring specifically to management's choice among discrete strategies with continuous performance outcomes. We then present readily implementable econometric methods to correct for endogeneity and, when feasible, provide STATA code to ease implementation. We also discuss extensions and nuances of these models that are sometimes difficult to decipher in more standard treatments. These extensions are not typically discussed in the strategy literature, but they are, in fact, highly pertinent to empirical strategic management research.