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Currently, I am analyzing capital expenditure of takeover-targets in the year prior to the takeover.

The dependent variable is capital expenditure and one of the explanatory variables is Tobin's q. High value results in lower financing costs which affects capital expenditure. However, capital expenditure is also likely to directly affect firm value.

I would like to solve this endogeneity issue by means of 2SLS without using instrumental variables, how should I proceed?

Thank you in advance.

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  • $\begingroup$ Maybe this would be easier if you selected different variables? As it stands right now, you're trying to compare a normalized ratio with a cash flow figure. $\endgroup$ – David Addison Feb 2 '18 at 18:12
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I am guessing this is part of a bachelor or master thesis?

In general, I found this paper to be very helpful when writing my own thesis ( Roberts, Michael R. and Whited, Toni M., Endogeneity in Empirical Corporate Finance).

For anyone to give you more specific recommendations, additional info on your data-set and what you are trying to do would be useful.

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