Hello everybody,

I want to analyse determinants of corporate leverage in the past twenty years (with regard to recent low interest rates). Therefore, I perform a system GMM with xtabond2 as instructed by Roodman 2009 ("How to do xtabond"). I have read the paper first, of course.

My core firm-specific factors (endogenous) are: profitability, tangibility, market-to-book ratio, size and median industry leverage. I also use year dummies, which I assume to be strictly exogenous. As Roodman says, all regressors should enter the instruments matrix set up by gmmstyle() and ivstyle(), depending on the classification of regressors (predetermined, endogenous, strictly exogenous). However, even though I am strictly following Roodman, my Hansen test results are quite disappointing. I tried different sets of instruments, but the best I got was 0.05. I also use the collapse and laglimits option, but the null of instrument validity keeps getting rejected. I also reduced the number of years to ten. The null keeps getting rejected. What am I missing here?

Additionally, since I want to estimate coefficients for interest rate factors, how can I run the analysis without the year dummies? As Roodman says, one should always include the dummies. But that makes all of my interest rate factors omitted due to collinearity.

I run the command:

Code:
xtabond2 tdm_w l1.tdm_w profitablty_w mtb_w tangiblty_w size indlevm_w yr*, gmmstyle(L.(tdm_w profitablty_w mtb_w tangiblty_w size), lagl
> imits (2 3) collapse) ivstyle( yr*, equation(level)) twostep robust small orthogonal
and the output is as following:

Code:
 Dynamic panel-data estimation, two-step system GMM
------------------------------------------------------------------------------
Group variable: id                              Number of obs      =     89422
Time variable : year                            Number of groups   =      9135
Number of instruments = 34                      Obs per group: min =         1
F(26, 9134)   =    693.94                                      avg =      9.79
Prob > F      =     0.000                                      max =        19
-------------------------------------------------------------------------------
              |              Corrected
        tdm_w |      Coef.   Std. Err.      t    P>|t|     [95% Conf. Interval]
--------------+----------------------------------------------------------------
        tdm_w |
          L1. |   .7361274   .0219671    33.51   0.000     .6930671    .7791878
              |
profitablty_w |   .0238564     .01837     1.30   0.194     -.012153    .0598657
        mtb_w |   -.002019   .0023063    -0.88   0.381    -.0065398    .0025018
  tangiblty_w |  -.0092912   .0222226    -0.42   0.676    -.0528525      .03427
         size |  -.0086231    .003725    -2.31   0.021    -.0159249   -.0013212
    indlevm_w |   .3406029   .1060849     3.21   0.001     .1326528    .5485531
          yr1 |          0  (omitted)
          yr2 |   -.077951   .0105912    -7.36   0.000     -.098712     -.05719
          yr3 |  -.0692224   .0075676    -9.15   0.000    -.0840565   -.0543883
          yr4 |  -.1041507   .0098989   -10.52   0.000    -.1235548   -.0847466
          yr5 |  -.0846216   .0070196   -12.06   0.000    -.0983815   -.0708616
          yr6 |  -.1429814   .0148919    -9.60   0.000    -.1721728     -.11379
          yr7 |  -.1097363   .0157845    -6.95   0.000    -.1406775    -.078795
          yr8 |  -.0866864   .0154577    -5.61   0.000    -.1169869   -.0563859
          yr9 |  -.0960668   .0166473    -5.77   0.000    -.1286993   -.0634344
         yr10 |  -.0625026   .0130212    -4.80   0.000    -.0880272    -.036978
         yr11 |          0  (omitted)
         yr12 |  -.1575229   .0121805   -12.93   0.000    -.1813993   -.1336465
         yr13 |  -.1154279   .0142346    -8.11   0.000    -.1433309    -.087525
         yr14 |  -.0661134   .0105783    -6.25   0.000    -.0868493   -.0453775
         yr15 |  -.0929222   .0118196    -7.86   0.000    -.1160912   -.0697532
         yr16 |  -.1137083   .0150861    -7.54   0.000    -.1432805   -.0841361
         yr17 |  -.0761268    .012738    -5.98   0.000    -.1010962   -.0511575
         yr18 |  -.0620756   .0095116    -6.53   0.000    -.0807205   -.0434308
         yr19 |  -.1078423   .0130321    -8.28   0.000    -.1333882   -.0822964
         yr20 |   -.097287   .0142452    -6.83   0.000    -.1252107   -.0693633
        _cons |   .1296548   .0311623     4.16   0.000     .0685697    .1907398
-------------------------------------------------------------------------------
Instruments for orthogonal deviations equation
  GMM-type (missing=0, separate instruments for each period unless collapsed)
    L(2/3).(L.tdm_w L.profitablty_w L.mtb_w L.tangiblty_w L.size) collapsed
Instruments for levels equation
  Standard
    yr1 yr2 yr3 yr4 yr5 yr6 yr7 yr8 yr9 yr10 yr11 yr12 yr13 yr14 yr15 yr16
    yr17 yr18 yr19 yr20
    _cons
  GMM-type (missing=0, separate instruments for each period unless collapsed)
    DL.(L.tdm_w L.profitablty_w L.mtb_w L.tangiblty_w L.size) collapsed
------------------------------------------------------------------------------
Arellano-Bond test for AR(1) in first differences: z = -27.69  Pr > z =  0.000
Arellano-Bond test for AR(2) in first differences: z =  -1.74  Pr > z =  0.082
------------------------------------------------------------------------------
Sargan test of overid. restrictions: chi2(7)    = 109.97  Prob > chi2 =  0.000
  (Not robust, but not weakened by many instruments.)
Hansen test of overid. restrictions: chi2(7)    =  56.49  Prob > chi2 =  0.000
  (Robust, but weakened by many instruments.)

Difference-in-Hansen tests of exogeneity of instrument subsets:
  GMM instruments for levels
    Hansen test excluding group:     chi2(2)    =  18.67  Prob > chi2 =  0.000
    Difference (null H = exogenous): chi2(5)    =  37.82  Prob > chi2 =  0.000
I would greatly appreciate any help.
Thanks in advance and merry christmas to everybody!