Dear Statalist,
I am trying to gain more economic intuition on IV estimation. I am
estimating the following model using a panel dataset of firm-year
observations:
Leverage Ratio = a + b*Tangible Assets+e.
Suppose Tangible Assets is endogenous. My instrument is a proxy for
Demand of Tangible Assets (Instrument1). Question 1) If I estimate the
model using 2SLS, how do I interpret "b"? In particular, is it
possible to state that "b" tells me how Demand of Tangible Assets
affects the leverage ratio? Question 2) Suppose I have an additional
instrument (e.g., Firm Age - Instrument 2) and let's assume this in
unrelated to Leverage Ratio. If I estimate the model again using both
Instruments, it seems that "b" does not tell me anymore ONLY how
Demand of Tangible Assets affects the leverage ratio. Is my
interpretation correct?
Any thoughts on the issue is highly appreciated,
Erasmo
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