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An effective method is introduced to compensate for the mutual coupling effect in the estimation of signal parameter via rotational invariance techniques (ESPRIT) direction finding algorithm. The compensation method seeks to quantify the mutual coupling more accurately by using a new mutual impedance. Study of two closely spaced arriving signals shows that the high-resolution capability of ESPRIT can be achieved only when the mutual coupling effect is compensated for by using our new compensation method. Critical situations with a large signal level difference, with an increased mutual coupling effect resulting from a more compact-size antenna array, and with signals coming from a nonhorizontal elevation angle are also studied using the ESPRIT algorithm. Results show that the new compensation method, when applied to ESPRIT, is more accurate, more robust, and more flexible than the previous open-circuit voltage method.