In Search of Robust Methods for Dynamic Panel Data Models in Empirical Corporate Finance

61 Pages Posted: 3 Aug 2010 Last revised: 13 Dec 2014

See all articles by Viet Anh Dang

Viet Anh Dang

Alliance Manchester Business School

Minjoo Kim

University of Liverpool - Accounting and Finance Division

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies

Date Written: December 12, 2014

Abstract

We examine which methods are appropriate for estimating dynamic panel data models in empirical corporate finance. Our simulations show that the instrumental variable and GMM estimators are unreliable, and sensitive to the presence of unobserved heterogeneity, residual serial correlation, and changes in control parameters. The bias-corrected fixed-effects estimators, based on an analytical, bootstrap, or indirect inference approach, are found to be the most appropriate and robust methods. These estimators perform reasonably well even in models with fractional dependent variables censored at [0,1]. We verify these results in two empirical applications, on dynamic capital structure and cash holdings.

Keywords: Dynamic panel data estimation; GMM; bias correction; capital structure; cash holdings

JEL Classification: G30, G32, C23

Suggested Citation

Dang, Viet Anh and Kim, Minjoo and Shin, Yongcheol, In Search of Robust Methods for Dynamic Panel Data Models in Empirical Corporate Finance (December 12, 2014). Journal of Banking and Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1652824 or http://dx.doi.org/10.2139/ssrn.1652824

Viet Anh Dang (Contact Author)

Alliance Manchester Business School ( email )

AMBS Crawford House
Booth Street West
Manchester, Greater Manchester M15 6PB
United Kingdom
+44(0)16127 50438 (Phone)

Minjoo Kim

University of Liverpool - Accounting and Finance Division ( email )

227 Grove
Management School
Liverpool, Liverpool L69 3BX
United Kingdom

HOME PAGE: http://https://www.liverpool.ac.uk/management/staff/minjoo-kim/

Yongcheol Shin

University of York (UK) - Department of Economics and Related Studies ( email )

Heslington
York, YO1 5DD
United Kingdom

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