Hi,

I run a conditional logistic model.

Dependent Variable: Financial status (a binary variable),
Dependent Variables: Financial ratios, Corporate Governance Variables

The reviewer suggested checking the endogeneity issue between the dependent variable and corporate governance variables. For that, I choose one variable, board size as an instrument variable, which has the least correlation with the financial distress. Multiplied it with the % independence to get a number of independent board members.

correl bsize status
g number_ind_board_mem = bsize*bind
correl bsize status number_ind_board_mem

ivprobit status sta wcta tlta dual ins aind cind nind (number_ind_board_mem = bsize), twostep

Is there any test to ensure the validity and reliability of the chosen instrument, except correlation?


Regards,
Sumaira

Here are the results:

. correl bsize status
(obs=1,336)

bsize status

bsize 1.0000
status -0.0182 1.0000


. g number_ind_board_mem = bsize*bind

. correl bsize status number_ind_board_mem
(obs=1,336)

bsize status number~m

bsize 1.0000
status -0.0182 1.0000
number_ind~m 0.6164 -0.0680 1.0000

.
. ivprobit status sta wcta tlta dual ins aind cind nind (number_ind_board_mem =
> bsize), twostep
Checking reduced-form model...

Two-step probit with endogenous regressors Number of obs = 1,336
Wald chi2(9) = 156.85
Prob > chi2 = 0.0000


Coef. Std. Err. z P>z [95% Conf. Interval]

number_ind_b~m -.0013245 .0004092 -3.24 0.001 -.0021265 -.0005225
sta -.1339088 .0417514 -3.21 0.001 -.21574 -.0520777
wcta -2.155826 .2275308 -9.47 0.000 -2.601778 -1.709874
tlta -.1369385 .2056887 -0.67 0.506 -.540081 .266204
dual -.6820512 .1706843 -4.00 0.000 -1.016586 -.347516
ins -.0065843 .0014534 -4.53 0.000 -.0094328 -.0037357
aind -.0010084 .0050894 -0.20 0.843 -.0109834 .0089666
cind .0002136 .0034307 0.06 0.950 -.0065104 .0069377
nind -.0057245 .0025953 -2.21 0.027 -.0108112 -.0006378
_cons 2.34557 .4646972 5.05 0.000 1.43478 3.25636

Instrumented: number_ind_board_mem
Instruments: sta wcta tlta dual ins aind cind nind bsize

Wald test of exogeneity: chi2(1) = 0.72 Prob > chi2 = 0.3974