Dear Mark,
this was really helpful. Regarding my last question, i was referring
to the Hausman test for endogeneity.
There is a paper by Himmelberg et al. (Journal of Financial Economics
(one of the leading finance journals), 53 (1999) pp: 353-384) which on
page 373 states that the Hausman's test tends to overly reject the
null hypothesis of exogeneity if any of the explanatory variables are
correlated with the fixed effects. That is, the test would be
affected by Type I error. A copy and paste of the paragraph from the
paper follows:
"One can formalize this evidence against the exogeneity of managerial
ownership by testing for a correlation between the "xed e!ect and managerial
ownership. We could use a Hausman (1978) test, but this test would tend to
over-reject the null hypothesis of zero correlation because it would
tend to reject
if any of the explanatory variables were correlated with the "xed e!ect.
To reduce this Type I error, we construct a more precise &conditional moment'
test, which is in the spirit of a Hausman test, but tends to reject only if
managerial ownership is the source of the speci"cation error (Greene, 1997,
p. 534; Newey, 1985)."
Thanks very much,
Erasmo
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