I am currently running my model fit diagnostics for my FE model (after Hausman Test lead me there) for my unbalanced panel data (over 20 years for 300 firm observations). My main variables of interest are ROA (continuous DV) and Firmstatus (Family /non-Family hence binary IV). As I would lose my Binary Firmstatus variable using the FE command I instead added dummies for Industry Fixed Effects and Year Fixed Effects to the normal regress command (which if I only believe there to be those two kinds of FE should lead to the same result, right?!). Please find the code and output below. When applying the VIF test afterwards quite a few dummies show a very high VIF, I however believe to have heard that high VIF in the fixed effects (hence in the dummies) is not an issue for as long as my main variables of interest do have low VIF. Is that correct?
Also my model excludes quite a few of the dummies due to multicollinearity. Is that something I can be relaxed about or should I exclude those dummies from the model? That however would lead to an inconsistent FE, wouldn't it? As only including the dummies for some years and some industries seems very counter-intuitive to me.
Code:
reg ROA Family_Firm_Identifier Founder_Identity FirmAge FirmSize Indebtedness dSIC* Dummy*
note: dSIC_21 omitted because of collinearity
note: dSIC_25 omitted because of collinearity
note: dSIC_27 omitted because of collinearity
note: dSIC_28 omitted because of collinearity
note: dSIC_29 omitted because of collinearity
note: dSIC_211 omitted because of collinearity
note: dSIC_212 omitted because of collinearity
note: dSIC_218 omitted because of collinearity
note: dSIC_236 omitted because of collinearity
note: dSIC_245 omitted because of collinearity
note: dSIC_254 omitted because of collinearity
note: Dummy1997 omitted because of collinearity
Source | SS df MS Number of obs = 1,941
-------------+---------------------------------- F(70, 1870) = 7.53
Model | 5.25591976 70 .075084568 Prob > F = 0.0000
Residual | 18.653481 1,870 .009975124 R-squared = 0.2198
-------------+---------------------------------- Adj R-squared = 0.1906
Total | 23.9094008 1,940 .012324433 Root MSE = .09988
----------------------------------------------------------------------------------------
ROA | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-----------------------+----------------------------------------------------------------
Family_Firm_Identifier | .0188036 .0085665 2.20 0.028 .0020027 .0356044
Founder_Identity | -.0427618 .0098529 -4.34 0.000 -.0620856 -.0234379
FirmAge | .1853727 .1287851 1.44 0.150 -.0672048 .4379503
FirmSize | .003569 .0019351 1.84 0.065 -.0002263 .0073642
Indebtedness | -.0573934 .0159563 -3.60 0.000 -.0886874 -.0260993
dSIC_21 | 0 (omitted)
dSIC_22 | -.1449583 .073005 -1.99 0.047 -.2881381 -.0017784
dSIC_23 | .0009146 .0764311 0.01 0.990 -.1489847 .1508138
dSIC_24 | -.0674274 .1009501 -0.67 0.504 -.2654141 .1305592
dSIC_25 | 0 (omitted)
dSIC_26 | -.0012879 .0744527 -0.02 0.986 -.1473071 .1447313
dSIC_27 | 0 (omitted)
dSIC_28 | 0 (omitted)
dSIC_29 | 0 (omitted)
dSIC_210 | -.0025597 .0872761 -0.03 0.977 -.1737286 .1686092
dSIC_211 | 0 (omitted)
dSIC_212 | 0 (omitted)
dSIC_213 | .0368844 .072704 0.51 0.612 -.1057052 .1794739
dSIC_214 | -.0374997 .0718448 -0.52 0.602 -.1784041 .1034047
dSIC_215 | -.0157173 .0762414 -0.21 0.837 -.1652445 .1338099
dSIC_216 | -.0230872 .0734984 -0.31 0.753 -.1672348 .1210603
dSIC_217 | .0176328 .0748015 0.24 0.814 -.1290703 .164336
dSIC_218 | 0 (omitted)
dSIC_219 | .0173708 .0747813 0.23 0.816 -.1292929 .1640345
dSIC_220 | -.0658194 .0718646 -0.92 0.360 -.2067626 .0751238
dSIC_221 | -.0647588 .0718314 -0.90 0.367 -.205637 .0761194
dSIC_222 | .0349215 .0725374 0.48 0.630 -.1073412 .1771841
dSIC_223 | -.0128589 .072365 -0.18 0.859 -.1547835 .1290657
dSIC_224 | -.0398613 .0751402 -0.53 0.596 -.1872288 .1075062
dSIC_225 | -.0558447 .0743697 -0.75 0.453 -.201701 .0900116
dSIC_226 | -.0873475 .08709 -1.00 0.316 -.2581514 .0834563
dSIC_227 | .0127991 .0735681 0.17 0.862 -.1314851 .1570833
dSIC_228 | .0115055 .0752447 0.15 0.878 -.136067 .1590779
dSIC_229 | -.0619794 .0747614 -0.83 0.407 -.2086039 .084645
dSIC_230 | .0092115 .0731454 0.13 0.900 -.1342437 .1526668
dSIC_231 | -.0776747 .0724366 -1.07 0.284 -.2197397 .0643904
dSIC_232 | -.0282482 .0724722 -0.39 0.697 -.1703831 .1138868
dSIC_233 | -.0375641 .0725277 -0.52 0.605 -.1798078 .1046796
dSIC_234 | .0437672 .0746224 0.59 0.558 -.1025847 .1901191
dSIC_235 | .0005581 .0741014 0.01 0.994 -.1447721 .1458882
dSIC_236 | 0 (omitted)
dSIC_237 | .0545687 .0726822 0.75 0.453 -.087978 .1971155
dSIC_238 | -.0074123 .0764702 -0.10 0.923 -.1573882 .1425637
dSIC_239 | .0703232 .0719653 0.98 0.329 -.0708175 .2114638
dSIC_240 | -.0552216 .0724247 -0.76 0.446 -.1972633 .0868201
dSIC_241 | -.1479057 .0721074 -2.05 0.040 -.2893251 -.0064862
dSIC_242 | -.0484005 .0813355 -0.60 0.552 -.2079184 .1111175
dSIC_243 | -.0688708 .072801 -0.95 0.344 -.2116505 .0739089
dSIC_244 | -.1035505 .0742998 -1.39 0.164 -.2492696 .0421687
dSIC_245 | 0 (omitted)
dSIC_246 | .1040758 .1011427 1.03 0.304 -.0942886 .3024402
dSIC_247 | -.0621619 .0805607 -0.77 0.440 -.2201601 .0958364
dSIC_248 | -.0381583 .0924176 -0.41 0.680 -.2194108 .1430942
dSIC_249 | -.0188679 .0715424 -0.26 0.792 -.1591792 .1214434
dSIC_250 | -.0536758 .0791216 -0.68 0.498 -.2088517 .1015001
dSIC_251 | -.0338603 .1010242 -0.34 0.738 -.2319923 .1642717
dSIC_252 | -.0104392 .0723414 -0.14 0.885 -.1523176 .1314392
dSIC_253 | -.0396922 .075325 -0.53 0.598 -.1874221 .1080377
dSIC_254 | 0 (omitted)
Dummy1996 | -.0074366 .0160545 -0.46 0.643 -.0389232 .0240499
Dummy1997 | 0 (omitted)
Dummy1998 | .0033208 .0158193 0.21 0.834 -.0277046 .0343462
Dummy1999 | .0085642 .0155393 0.55 0.582 -.0219119 .0390403
Dummy2000 | .0076011 .0154038 0.49 0.622 -.0226093 .0378115
Dummy2001 | -.0204896 .0153838 -1.33 0.183 -.0506608 .0096817
Dummy2002 | -.013163 .0153123 -0.86 0.390 -.043194 .016868
Dummy2003 | -.0112213 .0153591 -0.73 0.465 -.0413441 .0189014
Dummy2004 | -.0097841 .0153916 -0.64 0.525 -.0399706 .0204023
Dummy2005 | -.0102948 .0154268 -0.67 0.505 -.0405503 .0199608
Dummy2006 | -.0059925 .0157086 -0.38 0.703 -.0368008 .0248158
Dummy2007 | -.0121173 .0157905 -0.77 0.443 -.0430863 .0188516
Dummy2008 | -.0196699 .015766 -1.25 0.212 -.0505907 .011251
Dummy2009 | -.0219917 .015882 -1.38 0.166 -.05314 .0091566
Dummy2010 | -.0055589 .0160647 -0.35 0.729 -.0370655 .0259477
Dummy2011 | -.0026359 .015913 -0.17 0.868 -.0338449 .0285731
Dummy2012 | -.0220094 .0159773 -1.38 0.169 -.0533446 .0093258
Dummy2013 | -.0035355 .0162617 -0.22 0.828 -.0354285 .0283574
Dummy2014 | -.0041097 .0161099 -0.26 0.799 -.0357051 .0274856
Dummy2015 | -.0189518 .0161629 -1.17 0.241 -.0506509 .0127473
Dummy2016 | -.0173793 .0162946 -1.07 0.286 -.0493368 .0145782
Dummy2017 | -.0176761 .0167466 -1.06 0.291 -.0505202 .015168
Dummy2018 | -.0204806 .0217803 -0.94 0.347 -.0631969 .0222356
_cons | -1.232561 .9828261 -1.25 0.210 -3.160112 .6949908
----------------------------------------------------------------------------------------
.
end of do-file
. estat vif
Variable | VIF 1/VIF
-------------+----------------------
dSIC_249 | 104.81 0.009541
dSIC_214 | 68.10 0.014684
dSIC_221 | 65.86 0.015183
dSIC_241 | 56.85 0.017590
dSIC_220 | 51.88 0.019274
dSIC_239 | 50.17 0.019930
dSIC_231 | 41.79 0.023928
dSIC_213 | 35.76 0.027968
dSIC_230 | 33.20 0.030125
dSIC_240 | 32.05 0.031199
dSIC_223 | 31.02 0.032240
dSIC_252 | 30.50 0.032782
dSIC_233 | 30.17 0.033149
dSIC_232 | 29.63 0.033754
dSIC_243 | 27.39 0.036508
dSIC_237 | 27.30 0.036628
dSIC_222 | 27.19 0.036774
dSIC_22 | 21.96 0.045547
dSIC_216 | 17.57 0.056924
dSIC_227 | 17.08 0.058561
dSIC_225 | 14.22 0.070309
dSIC_235 | 14.12 0.070819
dSIC_234 | 13.23 0.075574
dSIC_244 | 12.58 0.079505
dSIC_26 | 12.09 0.082734
dSIC_228 | 11.79 0.084815
dSIC_217 | 11.65 0.085823
dSIC_224 | 11.20 0.089257
dSIC_219 | 11.10 0.090116
dSIC_229 | 11.09 0.090164
dSIC_253 | 9.03 0.110794
dSIC_215 | 8.10 0.123467
dSIC_238 | 7.57 0.132102
dSIC_23 | 7.56 0.132237
dSIC_250 | 5.62 0.177871
dSIC_247 | 5.18 0.192919
dSIC_242 | 4.63 0.216187
Founder_Id~y | 4.11 0.243097
Family_Fir~r | 3.49 0.286474
dSIC_210 | 3.05 0.328068
dSIC_226 | 3.04 0.329471
dSIC_248 | 2.56 0.389906
Dummy2002 | 2.19 0.457205
Dummy2003 | 2.18 0.458861
Dummy2005 | 2.18 0.459329
Dummy2004 | 2.17 0.461435
Dummy2001 | 2.16 0.461901
Dummy2000 | 2.15 0.465301
Dummy2006 | 2.10 0.476032
Dummy2007 | 2.10 0.476203
Dummy1999 | 2.10 0.476288
Dummy2008 | 2.09 0.477685
Dummy2009 | 2.08 0.481163
Dummy2014 | 2.07 0.483763
Dummy2016 | 2.07 0.484014
Dummy2011 | 2.06 0.484668
Dummy2015 | 2.06 0.486200
Dummy2012 | 2.06 0.486235
dSIC_246 | 2.05 0.488053
dSIC_251 | 2.04 0.489199
FirmSize | 2.04 0.489520
dSIC_24 | 2.04 0.489917
Dummy2010 | 2.03 0.492160
Dummy1998 | 2.02 0.495994
Dummy2013 | 2.01 0.497744
Dummy2017 | 2.00 0.499703
FirmAge | 1.97 0.507707
Dummy1996 | 1.96 0.510676
Indebtedness | 1.51 0.662036
Dummy2018 | 1.45 0.689321
-------------+----------------------
Mean VIF | 14.92
.
0 Response to very high VIF in FE: An issue?
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