Endogeneity in Strategy-Performance Analysis: An Application to Initial Human Capital Strategy and New Venture Performance

Managers engage in a variety of strategies, not randomly, but having in mind their performance implications. Therefore, strategic choices are endogenous in performance equations. Despite increasing efforts by various scholars in solving endogeneity bias, prior attempts have almost exclusively focused on single, one-sided, and discrete (binary) organizational decisions. Yet, in reality, managers often face multiple, simultaneous, and interdependent decisions, possibly including a continuous choice set. These choices may further entail a two-sided process between managers and others, such as employees, strategic partners, customers, or investors, whose choices and preferences also affect the final decision. We discuss how endogeneity can plague the measurement of the performance effects of these two-sided strategic decisions—which are more complex, but more realistic, than prior representations of organizational decision making. We provide an empirical demonstration of possible methods to deal with three different sources of bias, by analyzing the performance effects of two human capital choices made by founders at startup: the size and average quality of the initial workforce.