Panel Data Estimation in Finance: Testable Assumptions and Parameter (In)Consistency
49 Pages Posted: 6 Apr 2016 Last revised: 19 Apr 2018
Date Written: April 09, 2018
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: Suggested Citation