THE ISLAMIA UNIVERSITY OF BAHAWALPUR

NEW CAMPUS, BAHAWALPUR.

(DEPARTMENT OF MANAGEMENT SCIENCES)

ONLINE ASSIGNMENT

 Subject: Business Research Methods

 Class: MBA (Non Business)(Weekend)
 Semester: 2nd
 Topic: Structural Equation Modeling

SUBMITTED TO:

 Honourable Supervisor,

Dr. Waseem ul Hameed

Management Sciences Departt
I.U.B Bahawalpur.
SUBMITTED BY:

 Name: M.Muhammad Sohail Zafar

 Registration: F20BMGMT3M05054
 Structural Equation Modeling (SEM)
(1)Introduction: Structural equation modeling (SEM) is a
methodology for representing, estimating, and testing a
network of relationships between variables (measured
variables and latent constructs). Examples include path
analysis/ regression, repeated measures analysis/latent
growth curve modeling, and confirmatory factor analysis.
Participants will learn basic skills to analyze data with
structural equation modeling.
Analyzing research data and interpreting results can be
complex and confusing. Traditional statistical approaches to
data analysis specify default models, assume measurement
occurs without error, and are somewhat inflexible. However,
structural equation modeling requires specification of a
model based on theory and research, is a multivariate
technique incorporating measured variables and latent
constructs, and explicitly specifies measurement error. A
model (diagram) allows for specification of relationships
between variables.
(2) Meaning: Different scholars have advanced the concept of
Structural Equation Modeling(SEM) in following words;
“Structural Equation Modeling is a comprehensive
statistical approach to testing hypotheses about relations
among observed and latent variables.” (Hoyle, 1995)
“Structural Equation Modeling is a methodology for
representing, estimating, and testing a theoretical network
of (mostly) linear relations between variables”. (Rigdon,
1998)
 “Structural Equation Modeling means tests hypothesized
patterns of directional and non-directional relationships
among a set of observed (measured) and unobserved (latent)
variables.” (MacCallum & Austin, 2000)
(3) Definition: Structural equation modeling is a multivariate
statistical analysis technique that is used to analyze
structural relationships. This technique is the combination
of factor analysis and multiple regression analysis, and it is
used to analyze the structural relationship between
measured variables and latent constructs. This method is
preferred by the researcher because it estimates the
multiple and interrelated dependence in a single analysis.
In this analysis, two types of variables are used endogenous
variables and exogenous variables. Endogenous variables
are equivalent to dependent variables and are equal to the
independent variable.
(4) Purpose: The purpose of the model, in the most common
form of SEM, is to account for variation and covariation of
the measured variables (MVs). Path analysis (e.g.,
regression) tests models and relationships among MVs.
Confirmatory factor analysis tests models of relationships
between latent variables (LVs or common factors) and MVs
which are indicators of common factors. Latent growth
curve models (LGM) estimate initial level (intercept), rate of
change (slope), structural slopes, and variance. Special
cases of SEM are regression, canonical correlation,
confirmatory factor analysis, and repeated measures
analysis of variance.
 In nutshell,
Two goals in SEM are
(i) To understand the patterns of
correlation/covariance among a set of variables.
(ii) To explain as much of their variance as possible
with the model specified
(5) Explanation: Structural equation modeling can be thought
of as a set of relationships providing consistency and
comprehensive explanations of the actual phenomena.
There are two types of models;
(I) Measurement Model: The measurement model
represents the theory that specifies how measured
variables come together to represent the theory.
(i) Reliability: In SEM terms, the reliability of an
indicator is defined as the variance in that
indicator that is not accounted for by
measurement error. It is commonly represented
by the squared multiple correlation coefficient,
which ranges from 0 to 1.
(ii) Validity: Validity can be detected in SEM models
by comparison of factor loadings or
unstandardized λ coefficients for the same
measurement model estimated for different
subpopulations, by visually inspecting the
coefficients for the subpopulations.
(iii) Composite Reliability (CR): omposite reliability
(sometimes called construct reliability) is a
measure of internal consistency in scale items,
 much like Cronbach’s alpha. It can be thought of
as being equal to the total amount of true score
variance relative to the total scale score variance.
Alternatively, it’s an “indicator of the shared
variance among the observed variables used as
an indicator of a latent construct.
Confirmatory Factor Analysis is one way to
measure composite reliability, and it is widely
available in many different statistical software
packages.
(iv) Convergent Validity: To establish convergent
validity, you need to show that measures that
should be related are in reality related.
(v) Average Variance Extracted (AVE): In statistics
(classical test theory), average variance extracted
(AVE) is a measure of the amount of variance that
is captured by a construct in relation to the
amount of variance due to measurement error.
In case of SEM, Average Variance Extracted (AVE)
is higher than 0.5 but we can accept 0.4.
Because Fornell and Larcker said that if AVE is
less than 0.5, but composite reliability is higher
than 0.6, the convergent validity of the construct
is still adequate.
(II) Structural Model: Structural model represents the
theory that shows how constructs are related to other
constructs.
Structural equation modeling is also called casual
modeling because it tests the proposed casual
relationships. The following assumptions are
assumed;
(i) Multivariate Normal Distribution: The
maximum likelihood method is used and
assumed for multivariate normal distribution.
Small changes in multivariate normality can lead
to a large difference in the chi-square test.
(ii) Linearity: A linear relationship is assumed
between endogenous and exogenous variables.
(iii) Outlier: Data should be free of outliers. Outliers
affect the model significance.
(iv) Sequence: There should be a cause and effect
relationship between endogenous and exogenous
variables, and a cause has to occur before the
event.
(v) Non-Spurious Relationship: Observed
covariance must be true.
(vi) Model Identification: Equations must be greater
than the estimated parameters or models should
be over identified or exact identified. Under
identified models are not considered.
(vii) Sample Size: Most of the researchers prefer a
200 to 400 sample size with 10 to 15 indicators.
As a rule of thumb, that is 10 to 20 times as
many cases as variables.
 (viii) Uncorrelated Error Terms: Error terms are
assumed uncorrelated with other variable error
terms.
(ix) Data: Interval data is used.
(6) SEM Process: A suggested approach to SEM analysis
proceeds through the following process;
(I) Defining Individual Constructs: The first step is to
define the constructs theoretically. Conduct a pretest
to evaluate the item. A confirmatory test of the
measurement model is conducted using CFA.
(II) Developing the Overall Measurement Model: The
measurement model is also known as path analysis.
Path analysis is a set of relationships between
exogenous and endogens variables. This is shown by
the use of an arrow. The measurement model follows
the assumption of unidimensionality. Measurement
theory is based on the idea that latent constructs
cause the measured variable and that the error term is
uncorrelated within measured variables. In a
measurement model, an arrow is drawn from the
measured variable to the constructs.
(III) Design the Study to Produce the Empirical Results:
In this step, the researcher must specify the model.
The researcher should design the study to minimize
the likelihood of an identification problem. Order
condition and rank condition methods are used to
minimize the identification problem.
 (IV) Assessing The Measurement Model Validity:
Assessing the measurement model is also called CFA.
In CFA, a researcher compares the theoretical
measurement against the reality model. The result of
the CFA must be associated with the constructs’
validity.
(V) Specifying The Structural Model: In this step,
structural paths are drawn between constructs. In the
structural model, no arrow can enter an exogenous
construct. A single-headed arrow is used to represent
a hypothesized structural relationship between one
construct and another. This shows the cause and
effect relationship. Each hypothesized relationship
uses one degree of freedom. The model can be
recursive or non-recursive.
(VI) Examine The Structural Model Validity: In the last
step, a researcher examines the structural model
validity. A model is considered a good fit if the value of
the chi-square test is insignificant, and at least one
incremental fit index (like CFI, GFI, TLI, AGFI, etc.)
and one badness of fit index (like RMR, RMSEA,
SRMR, etc.) meet the predetermined criteria.
(7) Conclusion: Traditional approaches differ from the SEM
approach in several areas. First, SEM is a highly flexible
and comprehensive methodology. This methodology is
appropriate for investigating achievement, economic trends,
health issues, family and peer dynamics, self-concept,
exercise, self-efficacy, depression, psychotherapy, and other
phenomenon.
Second, traditional methods specify a default model
whereas SEM requires formal specification of a model to be
estimated and tested. SEM offers no default model and
places few limitations on what types of relations can be
specified. SEM model specification requires researchers to
support hypothesis with theory or research and specify
relations a priori.
Third, SEM is a multivariate technique incorporating
observed (measured) and unobserved variables (latent
constructs) while traditional techniques analyze only
measured variables. Multiple, related equations are solved
simultaneously to determine parameter estimates with SEM
methodology.
Fourth, SEM allows researchers to recognize the imperfect
nature of their measures. SEM explicitly specifies error
while traditional methods assume measurement occurs
without error.
Finally, a graphical language provides a convenient and
powerful way to present complex relationships in SEM.
Model specification involves formulating statements about a
set of variables. A diagram, a pictorial representation of a
model, is transformed into a set of equations. The set of
equations are solved simultaneously to test model fit and
estimate parameters.