Panel Data Regression Models

Key points
01 Introduction to Panel Data Regression

02 Panel Data Regression Models

03 Estimation and Interpretation of Results

04 Research Paper Discussion

 Introduction Panel Data Regression

Panel data regression models are based on panel data, which are
observations on the same cross-sections/units/individuals, over
different time periods.
Panel Data Regression Models
Pooled regression model
 All coefficients constant across time and individuals

 OLS assumption violation/Endogeneity issue

Fixed Effects Model
 The term “fixed effects” is due to the fact that, although the
intercept may differ across individuals, each individual’s
intercept does not vary over time; that is, it is time invariant.
 FEM is appropriate in situations where the individuals specific
intercept may be correlated with one or more regressors.
 FEM model controls for all time-invariant differences between
the individuals, so the estimated coefficients of the fixed-effects
models cannot be biased because of omitted time-invariant
characteristics…[like culture, religion, gender, race, etc.]
Fi: Firms’ dependent variables / may change across firms but don’t
change over time (Time invariant variable)
For example; Industry; Focus or diversified firm; Directors’ skills;
Directors’ education, Directors’ degree (Business/non-business)
Fixed effects model:

 In fixed effects approach, the intercept may differ across individuals,
each individual’s intercept does not vary over time; that is, it is time
invariant. However, the slope coefficients of the regressors do not
vary across individuals or over time.
 Random Effects Model
 REM model is appropriate in situations where the (random)
intercept of each cross-sectional unit is uncorrelated with regressors.
 It assumes that in REM model, intercept value of an individual unit
is random.
 An advantage of random effects is that you can include time
invariant variables (i.e. gender). In the fixed effects model these
variables are absorbed by the intercept.
Random effects model:

 
Instead of treating as fixed, we assume that it is a random variable
with a mean value of. The individual differences in the intercept val-
ues of each company are reflected in the error term.
 
 Fixed Effects Model or Random Effects Model
Testing for choosing between models (Hausman test)
H0: Cov (Xit, uit) = 0; (no correlation between regressors and
errors)
→ Both FE and RE are consistent but FE is inefficient.
HA: Cov (Xit, uit) ≠ 0; (significant correlation between regressors
and errors)
→ FE is consistent and RE is inconsistent.