CPU BUSINESS AND INFORMATION TECHNOLOGY

COLLEGE
SCHOOL OF GRATUATE STUDIES

STRUCTURAL EQUATION MODELING &

FACTOR ANALYSIS
BY:
ABEBA ALEM – EMBA382/14
BETHLEHEM GETACHEW -- EMBA383/14
ZEHAB SHEMSU – EMBA019/14 July/2022
SARA KIFLE – EMBA907/14
SEWAGEGNEHU TAMENE -- – EMBA908/14
A.A
BESUFIKAD YITBAREK -- – EMBA357/14

Sub. To: Dr. Adem (PhD)

 Structural Equation Modeling
 Structural equation modeling (SEM) is a series of
statistical methods that allow complex relationships
between one or more independent variables and one
or more dependent variables. Though there are
many ways to describe SEM, it is most commonly
thought of as a hybrid between some form of
analysis of variance (ANOVA)/regression and some
form of factor analysis.
 In general, it can be remarked that SEM allows one to
perform some type of multilevel regression/ANOVA
on factors. It should therefore be quite familiar with
uni-variate and multivariate regression/ANOVA as
well as the basics of factor analysis to implement
SEM for the data.
 Structural Equation Modelling . . .
 types of variables that occur in SEM
 Variables that are not influenced by another/other
variables in a model are called exogenous variables.
As an example, suppose we have two factors that
cause changes in GPA, hours studying per week and
IQ. Suppose there is no causal relationship between
hours studying and IQ. Then both IQ and hours
studying would be exogenous variables in the model.

 Variables that are influenced by other variables in a

model are called endogenous variables. GPA would
be an endogenous variable in the previous example
in (a).
 Structural Equation Modelling . . .
 types of variables that occur in SEM
 A variable that is directly observed and measured is
called a manifest variable (indicator variable). In the
example in (a), all variables can be directly observed
and thus qualify as manifest variables. There is a
special name for a structural equation model which
examines only manifest variables, called path
analysis.
 A variable that is not directly measured is a latent
variable. For example, suppose we were additionally
interested in the impact of motivation on GPA.
Motivation, as it is an internal, non-observable state,
is indirectly assessed by a student’s response on a
questionnaire, and thus it is a latent variable.
 Structural Equation Modeling . . .
 Cont. . .
 For the purposes of SEM, specifically, moderation
refers to a situation that includes three or more
variables, such that the presence of one of those
variables changes the relationship between the other
two.
 This would imply a two-way interaction between
stress and psychological support if an ANOVA were
to be performed. Figure 1 shows a conceptual
diagram of moderation. This diagram shows that
there are three direct effects that are hypothesized to
cause changes in psychological adjustment – a main
effect of stress, a main effect of social support, and
an interaction effect of stress and social support.
 Structural Equation Modeling . . .
 Cont…
Stress

Psychological
Social Adjustment
Support

Stress X Social
Support
Interaction

 This would imply a two-way interaction that there are

three direct effects that are hypothesized to cause
changes in psychological adjustment – a main effect
of stress, a main effect of social support, and an
interaction effect of stress and social support.
 Structural Equation Modeling . . .
 Cont . . .
 the purposes of SEM, specifically, mediation refers to
a situation that includes three or more variables,
such that there is a causal process between all three
variables. Note that this is distinct from moderation
Mediation describes a much different relationship
that is generally more complex. In a mediation
relationship, there is a direct effect between an
independent variable and a dependent variable.
 There are also indirect effects between an
independent variable and a mediator variable, and
between a mediator variable and a dependent
variable.
 Structural Equation Modeling . . .
 Cont . . .
 Testing for mediation involves running a series of
regression analyses for all of the causal pathways
and some method of estimating a change in direct
effect. This technique is actually involved in
structural equation models that include mediator
variables .
Social
Support
Indirect Indirect
Effect Effect

Stress Psychological
(Revised) Direct Adjustment
Effect
 Structural Equation Modeling . . .
 Cont . . .

 Covariance and correlation are the building blocks of

how your data will be represented when doing any
programming or model specification within a
software program that implements structural
equation modeling. .

 A structural model is a part of the entire structural

equation model diagram that you will complete for
every model you propose. It is used to relate all of
the variables (both latent and manifest) you will need
to account for in the model
 Structural Equation Modeling . . .
 Cont . . .
 A measurement model is a part of the entire
structural equation model diagram that you will
complete for every model you propose. It is essential
if you have latent variables in your model. This part
of the diagram which is analogous to factor analysis.
There are a few important rules to follow when
creating the measurement model and they will be
discussed in the second section of this document.
 Structural Equation Modeling . . .
 Cont . . .

 the structural model and the measurement model form

the entire structural equation model. This model
includes everything that has been measured, observed,
or otherwise manipulated in the set of variables
examined
A recursive structural equation model is a model in
which causation is directed in one single direction. A
non-recursive structural equation model has causation
which flows in both directions at some parts of the
model.
 Structural Equation Modelling . . .
 types of research question answered by SEM
 SEM can conceptually be used to answer any
research question involving the indirect or direct
observation of one or more independent variables or
one or more dependent variables. However, the
primary goal of SEM is to determine and validify a
proposed causal process and/or model. Therefore,
SEM is a confirmatory technique. The empirical
question of SEM is therefore whether the proposed
model produces a population covariance matrix that
is consistent with the sample covariance matrix.
Because one must specify a priori a model that will
undergo validation testing, there are many questions
SEM can answer.
 Structural Equation Modeling . . .
 Cont . . .
 SEM can tell you how if your model is adequate or not.
Parameters are estimated and compared with the
sample covariance matrix. Goodness of fit statistics
can be calculated that will tell you whether your model
is appropriate or needs further revision. SEM can also
be used to compare multiple theories that are
specified a priori.
 SEM can tell you the amount of variance in the
dependent variables (DVs) – both manifest and latent
DVs – is accounted for by the IVs
 Structural Equation Modelling . . .
 Limitations and Assumptions Regarding SEM
 Because SEM is a confirmatory technique, you must
plan accordingly. You must specify a full model a
priori and test that model based on the sample and
variables included in your measurements. You must
know the number of parameters you need to estimate
– including covariances, path coefficients, and
variances.
 Because SEM has the ability to model complex
relationships between multivariate data, sample size is
an important issue. Two popular assumptions are that
you need more than 200 observations, or at least 50
more than 8 times the number of variables in the
model. A larger sample size is always desired for
SEM.
 Structural Equation Modelling . . .
 Preparing Data for Analysis
 Assuming you have checked for model assumptions,
dealt with missing data, and imported your data into a
software package, you should obtain a covariance
matrix on your dataset. In SAS, you can run PROC
CORR and create an output file that has the
covariance matrix. Alternatively you can manually
type in the covariance matrix or import it from a
spreadsheet.
 Structural Equation Modelling . . .
 Drawing your hypothesized model: procedures and
notation
 The most important part of SEM analysis is the
causal model you are required to draw before
attempting an analysis.
 The following basic, general rules are used when
drawing a model:
 Rule 1. Latent variables/factors are represented with circles
and measured/manifest variables are represented with
squares.
 Rule 2. Lines with an arrow in one direction show a
hypothesized direct relationship between the two variables. It
should originate at the causal variable and point to the
variable that is caused. Absence of a line indicates there is
no causal relationship between the variables.
 Structural Equation Modelling . . .
 Cont …
 Rule 3. Lines with an arrow in both directions should be
curved and this demonstrates a bi-directional relationship
(i.e., a covariance).
o Rule 3a. Covariance arrows should only be allowed for
exogenous variables.

 Rule 4. For every endogenous variable, a residual term

should be added in the model. Generally, a residual term is a
circle with the letter E written in it, which stands for error.
o Rule 4a. For latent variables that are also endogenous, a
residual term is not called error in the lingo of SEM. It is
called a disturbance, and therefore the “error term” here
would be a circle with a D written in it, standing for
disturbance.
 Factor Analysis
 definition of factor analysis
 Factor analysis is a way to take a mass of data and
shrinking it to a smaller data set that is more
manageable and more understandable. It’s a way to
find hidden patterns, show how those patterns
overlap and show what characteristics are seen in
multiple patterns

 A “factor” is a set of observed variables that have

similar response patterns; They are associated with a
hidden variable (called a confounding variable) that
isn’t directly measured. Factors are listed according
to factor loadings, or how much variation in the data
they can explain.
 Factor Analysis
 The two types: exploratory and confirmatory.

 Exploratory factor analysis is if you don’t have any idea

about what structure your data is or how many dimensions
are in a set of variables.

 Confirmatory Factor Analysis is used for verification

as long as you have a specific idea about what
structure your data is or how many dimensions are in
a set of variables.
 Factor Analysis
 Cont . . .
 In exploratory factor analysis, we proceed as if we
have no hypothesis about the number of latent
factors and the relations between the latent factors
and the observed variables. Statistical procedures
are used to estimate the number of underlying
factors, and to estimate the factor loadings. In
exploratory factor analysis, the model is arbitrary: all
variables load on all factors.
 confirmatory factor analysis (CFA) models. In structural equation
modeling, the confirmatory factor model is imposed on the data. In
this case, the purpose of structural equation modeling is twofold.
(CFA) models. In structural equation modeling, the confirmatory
factor model is imposed on the data. In this case, the purpose of
structural equation modeling is twofold.
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