Confounded Coefficients: Accurately Comparing Logit and Probit Coefficients across Groups

Glenn Hoetker

Working Papers from University of Illinois at Urbana-Champaign, College of Business

Abstract: The logit and probit models are critical parts of the management researcher's analytical arsenal. We often want to know if a covariate has the same effect for different groups, e.g., foreign and domestic firms. Unfortunately, many attempts to compare the effect of covariates across groups make the unwarranted assumption that each group has the same residual variation. If this is not the case, comparisons of coefficients can reveal differences where none exist and conceal differences that do exist. This article explains the statistical and substantive implications of this assumption, introduces approaches to comparing coefficients that avoid making it, and uses simulations to explore the practical significance of the assumption and the power of approaches introduced to avoid it. As a practical example, I show that an apparent dramatic new insight into the technology strategy of Japanese computer manufacturers is actually just a manifestation of this problem. I close with implications for the practice of research.

Date: 2004-10
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Citations: View citations in EconPapers (10)

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