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

50 Pages Posted: 6 Apr 2016 Last revised: 31 Jan 2019

See all articles by William Grieser

William Grieser

Texas Christian University

Charles J. Hadlock

University of Pittsburgh

Date Written: April 9, 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 9, 2018). Journal of Financial and Quantitative Analysis (JFQA) (2018), 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

University of Pittsburgh ( email )

3950 Roberto Clemente Drive
Pittsburgh, PA 15260
United States

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