Re: st: interaction dummy or separate regression

[Austin Nichols <austinnichols@gmail.com>]

Khieu, Hinh <Hdkhieu@usi.edu> :
You are not going to get unbiased estimates of any of those coefs, if
that's what you mean.  You are not allowed to select on Y, nor include
a transformation of it as a regressor, and I strongly recommend you
explore what you are estimating using a simulation on generated data
where you know the true effects (a1, a2, etc.).  You are allowed to
select on an exogenous X variable, but not on "abnormal" Y.

On Wed, Sep 28, 2011 at 1:00 PM, Khieu, Hinh <Hdkhieu@usi.edu> wrote:
> Dear statalist members,
>
>
>
> I have the following model and I am not sure if there is an econometric issue with it. I would appreciate any amount of help. Change in Y = a1*growth opportunities + a2*profit + a3*debt + a4*equity +  a5*dummy (=1 if change in Y is abnormally high, zero otherwise) + a6 * debt * dummy + a7 * equity * dummy, where abnormally high is defined to be whenever change in Y is greater than 2 times the industry average of Y over the last 3 years (t, t-1, and t-2).
>
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> I run fixed effects regression with firm and year dummies on the above model for 2 groups of firms: large firms versus small firms. My question is: is there any mechanical or econometric problem with using the dummy for abnormal Y and its interaction with debt and equity? I know I  can split the sample into abnormal Y and normal Y and run two separate regressions. But I want to know specifically if the model above is problematic from an econometric perspective. What if I drop the dummy and keep only the interactions?

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