Interpreting dummy variables and their interaction effects in strategy research

Abstract

Dummy variables have been employed frequently in strategy research to capture the influence of categorical variables. However, misinterpretation of results may arise, especially when interaction effects between dummy variables and other explanatory variables are involved in a regression. We discuss two approaches of entering dummy variables into a regression and their associated interpretations. We discuss some common mistakes of interpretation and hypothesis testing found in two recently published strategy papers, and highlight the advantages of our recommended approach over the approach usually adopted by management researchers.