st: RE: within estimator as "phyrric-victory" in corporate finance?

["Schaffer, Mark E" <M.E.Schaffer@hw.ac.uk>]

Erasmo,

> -----Original Message-----
> From: owner-statalist@hsphsun2.harvard.edu 
> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of 
> Erasmo Giambona
> Sent: 20 January 2011 14:09
> To: statalist
> Subject: st: within estimator as "phyrric-victory" in 
> corporate finance?
> 
> Dear Statalist,
> 
> There is a large tendency in empirical corporate finance 
> research to rely on the within estimator. Now, this seems 
> appropraite to many on statistical ground. Empirical 
> corporate finance research relies on panel data for firms and 
> using the within estimator allows to control for for 
> time-invariate firm heterogeniety. However, once we "subtract"
> firm-level averages with the within estimators, it seems that 
> the coefficient estimates (within estimates) are ONLY 
> measuring the effect of a change in the RHS variables within 
> firm on changes in the dependent variable. This is 
> problematic because firms change very little and very slowly 
> and with fixed-effects many independent variables could 
> "appeear" statistically and/or economically insignificant, 
> while they might still be very powerful in explaining 
> cross-sectional variation.
> 
> Perhaps I am missing something on the interpretation of the 
> "within estimator"? That is, are these estimators preserving 
> cross-sectional variation in any way?

Short answer - no.  You've got it right.  All panel data econometrics
mainstream textbook stuff.

The classic article on this in the econometrics literature is Griliches,
Zvi & Hausman, Jerry A., 1986. "Errors in variables in panel data,"
Journal of Econometrics, Elsevier, vol. 31(1), pages 93-118, February.

Cheers,
Mark

> 
> I would appreaciate any reaction on this issue.
> 
> Best regards,
> 
> Erasmo
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