Hi,

In the context of corporate finance, some studies claim to use firm and industry fixed effects together in panel data regressions. However, since inclusion of firm effects takes care of all time invariant variables together, how is it possible for a researcher to include industry effects (the industry of a firm remains the same over generally) also in the same regression? I understand that if at all the industry of even a single firm in the dataset changes from one year to another, it would be mechanically possible to obtain results for fixed effects regression. But since the industry of a firm usually remains same across time for almost the entire set of firms in the sample, how reliable are beta coefficients of independent variables in case of a regression with firm and industry effects?

Here are some papers which employ firm and industry effects together:

Thakur, B., & Kannadhasan, M. (2018). Corruption and cash holdings: Evidence from emerging market economies. Emerging Markets Review, 38, 1-17. doi: 10.1016/j.ememar.2018.11.008

Venkiteshwaran, V. (2011). Partial adjustment toward optimal cash holding levels. Review Of Financial Economics, 20(3), 113-121. doi: 10.1016/j.rfe.2011.06.002

Thanks!