Panel Data Estimation in Finance: Testable Assumptions and Parameter (In)Consistency

49 Pages Posted: 6 Apr 2016 Last revised: 19 Apr 2018

William Grieser

Texas Christian University

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management

Date Written: April 09, 2018

Abstract

We investigate the strict exogeneity assumption, a necessary condition for estimator consistency in many finance panel settings. We outline tests for strict exogeneity in both traditional (non-IV) and IV settings. When we apply these tests in common traditional finance panel regressions, we find that the strict exogeneity assumption is often rejected, suggesting large inference errors. We test for strict exogeneity in specific finance IV panel settings and illustrate the potential for these tests to help confirm, or rule out, the validity of common panel IV estimators. We offer a set of recommendations to address the strict exogeneity issue in finance research.

Keywords: Corporate Finance, Panel Data, Fixed Effects, First Differences, Strict Exogeneity

JEL Classification: C23, G30

Suggested Citation

Grieser, William and Hadlock, Charles J., Panel Data Estimation in Finance: Testable Assumptions and Parameter (In)Consistency (April 09, 2018). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2759386 or http://dx.doi.org/10.2139/ssrn.2759386

William Grieser (Contact Author)

Texas Christian University ( email )

Fort Worth, TX 76129
United States

Charles J. Hadlock

Michigan State University - The Eli Broad College of Business and The Eli Broad Graduate School of Management ( email )

315 Eppley Center
East Lansing, MI 48824-1121
United States
517-353-9330 (Phone)
517-432-1080 (Fax)

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