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Estimating dynamic panel models in corporate finance

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  • Flannery, Mark J.
  • Hankins, Kristine Watson

Abstract

Dynamic panel models play a natural role in several important areas of corporate finance, but the combination of fixed effects and lagged dependent variables introduces serious econometric bias. Several methods of counteracting these biases are available and these methodologies have been tested on small datasets with independent, normally-distributed explanatory variables. However, no one has evaluated the methods' performance with corporate finance data, in which the dependent variable may be clustered or censored and independent variables may be missing, correlated with one another, or endogenous. We find that the data's properties substantially affect the estimators' performances. We provide evidence about the impact of various data set characteristics on the estimators, so that researchers can determine the best approach for their datasets.

Suggested Citation

  • Flannery, Mark J. & Hankins, Kristine Watson, 2013. "Estimating dynamic panel models in corporate finance," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 1-19.
  • Handle: RePEc:eee:corfin:v:19:y:2013:i:c:p:1-19
    DOI: 10.1016/j.jcorpfin.2012.09.004
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    More about this item

    Keywords

    Dynamic panels; Corporate finance; Econometrics;

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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