Misaccounting for endogeneity: The peril of relying on the Heckman two‐step method without a valid instrument

Sarah E. Wolfolds and Jordan Siegel

Strategic Management Journal, 2019, vol. 40, issue 3, 432-462

Abstract: Research Summary Strategy research addresses endogeneity by incorporating econometric techniques, including Heckman's two‐step method. The economics literature theorizes regarding optimal usage of Heckman's method, emphasizing the valid exclusion condition necessary in the first stage. However, our meta‐analysis reveals that only 54 of 165 relevant papers published in the top strategy and organizational theory journals during 1995–2016 claim a valid exclusion restriction. Without this condition being met, our simulation shows that results using the Heckman method are often less reliable than OLS results. Even where Heckman is not possible, we recommend that other rigorous identification approaches be used. We illustrate our recommendation to use a triangulation of identification approaches by revisiting the classic global strategy question of the performance implications of cross‐border market entry through greenfield or acquisition. Managerial Summary Managers make strategic decisions by choosing the best option given the particular circumstances of their firm. However, researchers had previously not taken into consideration these circumstances when evaluating the outcome of that choice. The Heckman method importantly addresses this situation, but requires that the researcher have some variable that effects the best option for the firm, but not the outcome. We show that researchers frequently do not utilize such a variable, and demonstrate that the Heckman method can exacerbate estimation issues in this case. We then provide an approach that researchers can use to address the challenge of determining the outcome of a strategic decision, and illustrate it with an empirical examination of the performance implications of cross‐border market entry through greenfield or acquisition.

Date: 2019
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