Which method delivers greater signal‐to‐noise ratio: Structural equation modelling or regression analysis with weighted composites?

Observational data typically contain measurement errors. Covariance‐based structural equation modelling (CB‐SEM) is capable of modelling measurement errors and yields consistent parameter estimates. In contrast, methods of regression analysis using weighted composites as well as a partial least squares approach to SEM facilitate the prediction and diagnosis of individuals/participants. But regression analysis with weighted composites has been known to yield attenuated regression coefficients when predictors contain errors. Contrary to the common belief that CB‐SEM is the preferred method for the analysis of observational data, this article shows that regression analysis via weighted composites yields parameter estimates with much smaller standard errors, and thus corresponds to greater values of the signal‐to‐noise ratio (SNR). In particular, the SNR for the regression coefficient via the least squares (LS) method with equally weighted composites is mathematically greater than that by CB‐SEM if the items for each factor are parallel, even when the SEM model is correctly specified and estimated by an efficient method. Analytical, numerical and empirical results also show that LS regression using weighted composites performs as well as or better than the normal maximum likelihood method for CB‐SEM under many conditions even when the population distribution is multivariate normal. Results also show that the LS regression coefficients become more efficient when considering the sampling errors in the weights of composites than those that are conditional on weights.