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

[Nick Cox <n.j.cox@durham.ac.uk>]

I can't do the econometrics here but I can do the ancient history: Pyrrhic! 

Nick 
n.j.cox@durham.ac.uk 

Erasmo Giambona

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?

I would appreaciate any reaction on this issue.


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