Practical Guidance on Using and Interpreting Fixed Effects Models

41 Pages Posted: 16 Oct 2020

See all articles by Ed deHaan

Ed deHaan

University of Washington - Michael G. Foster School of Business

Date Written: September 25, 2020

Abstract

Fixed effects are ubiquitous in accounting and finance studies, but many new researchers have only a vague understanding of how they function. This manuscript provides plain-English explanations of how fixed effects can eliminate certain omitted variable biases, affect standard errors, and alter how we should think about sample composition and the interpretation of coefficient estimates. I emphasize that, while fixed effects can be a powerful tool, they can come at the cost of efficiency and can introduce subtle but important econometric problems of their own. Better understanding these issues will help us all make better choices about how to design fixed effects models and carefully interpret the results thereof.

Keywords: research methods; econometrics; fixed effects; financial economics; accounting

JEL Classification: G00; M4; C58

Suggested Citation

deHaan, Ed, Practical Guidance on Using and Interpreting Fixed Effects Models (September 25, 2020). Available at SSRN: https://ssrn.com/abstract=3699777 or http://dx.doi.org/10.2139/ssrn.3699777

Ed DeHaan (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

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