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st: HELP on xtabond2

Subject   st: HELP on xtabond2
Date   Tue, 24 May 2005 15:09:44 -0400

I would very much appreciate your help and comments on my questions on xtabond2

I  am trying to estimate a dynamic panel data model using an unbalanced data set
with  more  than  50,000 observations, over 6,000 firms in 37 countries over the
1991  ?  2002 period. Each firm has a minimum of four consecutive years of data.

I  am  estimating the model using the One Step Robust GMM System estimator using
the command xtabond2 in STATA 8.0.
I  use  year,  industry  and  country  dummies to control for time, industry and
country specific effects.

I am using STATA Command as follows:

xi:xtabond2 Investmentratio l.Investmentratio Isquared Salesratio CFratio i.year
i.Industry, robust gmm(Investmentratio Salesratio CFratio, lag(2 3))

Investmentratio= ratio of Investment to capital= dependent variable
l.Investmentratio = lagged dependent variable = (lagged Investment ratio)
Isquared = square of lagged dependent variable
CFratio = ratio of Cash Flow to capital
Salesratio= ratio of sales to capital

I am treating the lagged dependent variable, the cash flow ratio and the sales
ratio as endogenous (by including all of them in the gmm style option).

The problem I am facing is that the validity of the instruments is rejected by
the Hansen J test of over- identifying restrictions.  The number of instruments
is 88.

      Chi2(31)=196.04         Prob>chi2=0.000

None of the coefficients is statistically significant.

I  tried  running the above equation for each country at a time. Surprisingly, I
got  P-values  =  0  for the Hansen J test of over- identifying restrictions for
five  developed  countries:  UK,  Italy,  Germany, France and Australia. I tried
running  the  equation  for  the  whole  data  set,  while  excluding these five
countries but still the validity of instruments got rejected with P-values=0.

I would very much appreciate your help on the following questions:

Question  (1):  Do I have to instrument for each endogenous variable (Investment
ratio, Cash Flow ratio and Sales ratio) by including each one of them in the gmm
list  of  instruments  as  I  already  have?,  or  can I use only one of them as
instrument in the gmm style option ?.

For  instance,  can I only use the cash Flow ratio as instrument with lags (2 3)
as follows:

Command: (here I am only accounting for time specific effects)

xi:xtabond2 Investmentratio l.Investmentratio Isquared Salesratio CFratio i.year
, robust gmm(CFratio, lag(2 3))

I  tried  the  above  specification,  and  the  validity  of the instruments get
accepted  (P value is 0.8).

Hansen test of overid. restrictions: chi2(14) =    8.82     Prob > chi2 =  0.842

Question  (2):  Is a P-value of 0.8 usual to get in a test for over- identifying
restrictions ?.

Question (3):  Can I use the instruments dated (t-2) only or the instruments
dated (t-3) only ?.

If yes, what would be the specified lags in that case ?.

Question (4): How to control for firm specific effects ?. Are they automatically
accounted for once I use firm/ country as panel identifier in STATA ?.

I would very much appreciate your help and time,

Thank you in advance,
Best regards,

Dahlia Anwar El- Hawary
Financial Sector Operations and Policy Department
World Bank
Tel: 202 473 5238

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