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st: Spurious inference from endogeneity tests


From   andreas.zweifel@uzh.ch
To   statalist@hsphsun2.harvard.edu
Subject   st: Spurious inference from endogeneity tests
Date   Tue, 17 Jan 2012 22:12:36 +0100

Dear Statausers,

I am concerned with an endogeneity problem in my sample of 126 firms when investigating the relationship between managerial disclosure and cost of capital effects. After running the ivreg28 command, the Cragg-Donald test F-statistic is 2.27, which indicates that my instruments are rather weak. However, my model appears to be correctly identified, because the Anderson test statistic for the first stage equation yields a p-value lower than 0.01 and the Sargan test statistic is insignificant (p-value = 0.59). Since my instruments have passed the overidentification test, I run the ivendog command which is equivalent to a Hausman test. Again, the test statistic is insignificant (p-value = 0.48). 

If I compare OLS and 2SLS, I find that only the former yields a significant coefficient of managerial disclosure in the model regressing cost of capital on managerial disclosure. Considering the specification tests above, it seems unlikely that 2SLS is an improvement over OLS. Thus I assume that I can take the OLS estimates for causal inference. Is this correct? If yes, the point why I should not use 2SLS is likely due to the weakness of the instruments and the small-sample bias. So I have to conclude from my specification tests that my coefficient estimates from both OLS and 2SLS cannot be interpreted because 2SLS does not succeed in resolving the endogeneity problem?

Your answers will be highly appreciated.

Thanks, Andreas
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