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st: interaction dummy or separate equations


From   "Khieu, Hinh" <Hdkhieu@usi.edu>
To   "statalist@hsphsun2.harvard.edu" <statalist@hsphsun2.harvard.edu>
Subject   st: interaction dummy or separate equations
Date   Tue, 27 Sep 2011 01:34:36 -0500

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).

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.

Thank you very much for your help in advance.

Regards,

Hinh



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