Evaluating Panel Regression Estimators in Corporate Finance: Evidence from CEO Pay

43 Pages Posted: 22 May 2018

See all articles by Daniela Osterrieder

Daniela Osterrieder

Rutgers Business School; CREATES

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics; Columbia University - Law School

Ge Wu

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: April 25, 2018

Abstract

The use of panel data in corporate finance is ubiquitous to estimate the impact of choices made by managers and/or shareholders on firm value. This study evaluates the properties of five regression estimators when one uses panel data. Specifically, we analyze three existing estimators (namely, the pooled OLS (POLS) estimator, the standard random-effects (RE) estimator, and the standard firm fixed-effects (FE) estimator), and introduce two additional estimators (efficient firm fixed-effects (EFE) estimator, and the efficient correlated random-effects (ECRE) estimator). Theoretically and in simulations we find that the EFE and ECRE estimators are consistent and have the lowest uncertainty, the FE estimator is consistent but has high uncertainty, and the POLS and RE estimators are inconsistent. However, when we use panel data to examine the relationship between CEO pay and firm value, we find the EFE estimator is the most appropriate. For applied research, we suggest a J-test to check whether the assumptions of the ECRE estimator hold. If they do, one can use either the ECRE or the EFE estimators. If they do not, one should use the EFE estimator.

Suggested Citation

Osterrieder, Daniela and Palia, Darius and Wu, Ge, Evaluating Panel Regression Estimators in Corporate Finance: Evidence from CEO Pay (April 25, 2018). Available at SSRN: https://ssrn.com/abstract=3168947 or http://dx.doi.org/10.2139/ssrn.3168947

Daniela Osterrieder (Contact Author)

Rutgers Business School ( email )

Janice H. Levin Bldg., Room 121
94 Rockafeller Road
Piscataway, NJ 08854-8054
United States

CREATES ( email )

Aarhus University
Fuglesangs Alle 4
DK-8210 Aarhus C
Denmark

Darius Palia

Rutgers University, Newark, School of Business-Newark, Department of Finance & Economics ( email )

111 Washington Street
MEC 134
Newark, NJ 07102
United States
973-353-5981 (Phone)
973-353-1233 (Fax)

Columbia University - Law School ( email )

435 W 116th St.
New York, NY 10027
United States

Ge Wu

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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