Hi,

Let me first say that I'm Stata-beginner and would appreciate your help. I have read many threads about the topic already but I'm still unsure how to apply the mentioned effects specifically to my data set. I'm using Stata 16.1 version.

I'm investigating the relationship between cash holdings (dependent variable) and litigation risk (independent variable) using another 14 independent variables as control variables. My sample consists of S&P 500 companies (excluding financials and utilities, a total of 351 firms) in the period of 2010-2019. I've run some tests on my data: Hausman test (indicated I should use fixed effects), Breush Pagan test (indicated heteroscedasticity) and Woolridge test (indicated autocorrelation). Taking these tests into account I'm using fixed effects and clustered standard errors.

In line with what I read on this forum I used i.industry i.year specifications but the problem here is that industry is a string variable. Since industry is based on SIC number (also included in my data) I decided to use i.sic i.year specification instead. However as you can see all of my sic codes were omitted due to collinearity problem. Also I don't understand why i.year starts from 2011 and ends at 2018 and is not from 2010 to 2019? In any case I guess that my attempt to incorporate both industry and year fixed effect does not work well and needs some correction. I'm pasting my output from Stata below (I'm sorry for pasting like this but there seems to be some limit and dataex didn't work for me).

. xtset id year
panel variable: id (strongly balanced)
time variable: year, 2010 to 2019
delta: 1 unit

.
. xtreg ln_cash lit_risk size mtb lev nwc rd growth cf cf_vol_5y industry_sigma acq capex ndi nei div, fe vce(cluster id)

Fixed-effects (within) regression Number of obs = 3,083
Group variable: id Number of groups = 351

R-sq: Obs per group:
within = 0.2541 min = 1
between = 0.5638 avg = 8.8
overall = 0.5253 max = 9

F(15,350) = 30.05
corr(u_i, Xb) = 0.2648 Prob > F = 0.0000

(Std. Err. adjusted for 351 clusters in id)
--------------------------------------------------------------------------------
| Robust
ln_cash | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------------+----------------------------------------------------------------
lit_risk | .0010818 .0005395 2.01 0.046 .0000208 .0021429
size | .6542184 .0506476 12.92 0.000 .5546065 .7538304
mtb | .0520193 .0123956 4.20 0.000 .0276401 .0763986
lev | -.8306861 .2475409 -3.36 0.001 -1.317541 -.3438313
nwc | -1.271489 .2906379 -4.37 0.000 -1.843105 -.6998721
rd | -.2963804 .1064015 -2.79 0.006 -.5056472 -.0871136
growth | -.2076923 .1445206 -1.44 0.152 -.4919303 .0765457
cf | -.1704632 .2847327 -0.60 0.550 -.7304655 .3895392
cf_vol_5y | 1.829619 .7456975 2.45 0.015 .3630073 3.296231
industry_sigma | 4.291135 2.156647 1.99 0.047 .0495159 8.532753
acq | -2.505081 .2492455 -10.05 0.000 -2.995289 -2.014874
capex | -3.471404 .8872684 -3.91 0.000 -5.216452 -1.726355
ndi | 1.698586 .275659 6.16 0.000 1.15643 2.240743
nei | .9345293 .2447038 3.82 0.000 .4532545 1.415804
div | -.0070305 .0713867 -0.10 0.922 -.1474314 .1333704
_cons | 1.013231 .4810271 2.11 0.036 .0671633 1.959298
---------------+----------------------------------------------------------------
sigma_u | 1.0028185
sigma_e | .48667142
rho | .80937608 (fraction of variance due to u_i)
--------------------------------------------------------------------------------

. xtreg ln_cash lit_risk size mtb lev nwc rd growth cf cf_vol_5y industry_sigma acq capex ndi nei div i.industry i.year, fe vce(cluster id)
industry: string variables may not be used as factor variables
r(109);

. xtreg ln_cash lit_risk size mtb lev nwc rd growth cf cf_vol_5y industry_sigma acq capex ndi nei div i.sic i.year, fe vce(cluster id)
note: 1311.sic omitted because of collinearity
note: 1381.sic omitted because of collinearity
note: 1389.sic omitted because of collinearity
note: 1400.sic omitted because of collinearity
note: 1531.sic omitted because of collinearity
note: 1600.sic omitted because of collinearity
note: 1731.sic omitted because of collinearity
note: 2000.sic omitted because of collinearity
note: 2011.sic omitted because of collinearity
note: 2030.sic omitted because of collinearity
note: 2033.sic omitted because of collinearity
note: 2040.sic omitted because of collinearity
note: 2052.sic omitted because of collinearity
note: 2060.sic omitted because of collinearity
note: 2070.sic omitted because of collinearity
note: 2080.sic omitted because of collinearity
note: 2082.sic omitted because of collinearity
note: 2085.sic omitted because of collinearity
note: 2086.sic omitted because of collinearity
note: 2090.sic omitted because of collinearity
note: 2111.sic omitted because of collinearity
note: 2273.sic omitted because of collinearity
note: 2300.sic omitted because of collinearity
note: 2320.sic omitted because of collinearity
note: 2400.sic omitted because of collinearity
note: 2430.sic omitted because of collinearity
note: 2510.sic omitted because of collinearity
note: 2621.sic omitted because of collinearity
note: 2631.sic omitted because of collinearity
note: 2650.sic omitted because of collinearity
note: 2670.sic omitted because of collinearity
note: 2810.sic omitted because of collinearity
note: 2820.sic omitted because of collinearity
note: 2821.sic omitted because of collinearity
note: 2834.sic omitted because of collinearity
note: 2835.sic omitted because of collinearity
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note: 2851.sic omitted because of collinearity
note: 2860.sic omitted because of collinearity
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note: 3011.sic omitted because of collinearity
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note: 3081.sic omitted because of collinearity
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note: 3411.sic omitted because of collinearity
note: 3420.sic omitted because of collinearity
note: 3430.sic omitted because of collinearity
note: 3490.sic omitted because of collinearity
note: 3510.sic omitted because of collinearity
note: 3511.sic omitted because of collinearity
note: 3523.sic omitted because of collinearity
note: 3531.sic omitted because of collinearity
note: 3533.sic omitted because of collinearity
note: 3540.sic omitted because of collinearity
note: 3559.sic omitted because of collinearity
note: 3560.sic omitted because of collinearity
note: 3561.sic omitted because of collinearity
note: 3570.sic omitted because of collinearity
note: 3572.sic omitted because of collinearity
note: 3576.sic omitted because of collinearity
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note: 3674.sic omitted because of collinearity
note: 3678.sic omitted because of collinearity
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note: 3711.sic omitted because of collinearity
note: 3714.sic omitted because of collinearity
note: 3721.sic omitted because of collinearity
note: 3724.sic omitted because of collinearity
note: 3728.sic omitted because of collinearity
note: 3730.sic omitted because of collinearity
note: 3751.sic omitted because of collinearity
note: 3760.sic omitted because of collinearity
note: 3812.sic omitted because of collinearity
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note: 3827.sic omitted because of collinearity
note: 3841.sic omitted because of collinearity
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note: 3990.sic omitted because of collinearity
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note: 4210.sic omitted because of collinearity
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note: 4812.sic omitted because of collinearity
note: 4813.sic omitted because of collinearity
note: 4841.sic omitted because of collinearity
note: 4888.sic omitted because of collinearity
note: 4899.sic omitted because of collinearity
note: 5000.sic omitted because of collinearity
note: 5010.sic omitted because of collinearity
note: 5013.sic omitted because of collinearity
note: 5047.sic omitted because of collinearity
note: 5122.sic omitted because of collinearity
note: 5140.sic omitted because of collinearity
note: 5200.sic omitted because of collinearity
note: 5211.sic omitted because of collinearity
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note: 5331.sic omitted because of collinearity
note: 5399.sic omitted because of collinearity
note: 5411.sic omitted because of collinearity
note: 5500.sic omitted because of collinearity
note: 5531.sic omitted because of collinearity
note: 5600.sic omitted because of collinearity
note: 5651.sic omitted because of collinearity
note: 5661.sic omitted because of collinearity
note: 5731.sic omitted because of collinearity
note: 5812.sic omitted because of collinearity
note: 5912.sic omitted because of collinearity
note: 5944.sic omitted because of collinearity
note: 5961.sic omitted because of collinearity
note: 5990.sic omitted because of collinearity
note: 7011.sic omitted because of collinearity
note: 7200.sic omitted because of collinearity
note: 7311.sic omitted because of collinearity
note: 7323.sic omitted because of collinearity
note: 7340.sic omitted because of collinearity
note: 7350.sic omitted because of collinearity
note: 7363.sic omitted because of collinearity
note: 7370.sic omitted because of collinearity
note: 7372.sic omitted because of collinearity
note: 7373.sic omitted because of collinearity
note: 7374.sic omitted because of collinearity
note: 7389.sic omitted because of collinearity
note: 7841.sic omitted because of collinearity
note: 7990.sic omitted because of collinearity
note: 8062.sic omitted because of collinearity
note: 8071.sic omitted because of collinearity
note: 8090.sic omitted because of collinearity
note: 8700.sic omitted because of collinearity
note: 8721.sic omitted because of collinearity
note: 8731.sic omitted because of collinearity
note: 8742.sic omitted because of collinearity

Fixed-effects (within) regression Number of obs = 3,083
Group variable: id Number of groups = 351

R-sq: Obs per group:
within = 0.2696 min = 1
between = 0.5484 avg = 8.8
overall = 0.5164 max = 9

F(23,350) = 23.08
corr(u_i, Xb) = 0.1569 Prob > F = 0.0000

(Std. Err. adjusted for 351 clusters in id)
--------------------------------------------------------------------------------
| Robust
ln_cash | Coef. Std. Err. t P>|t| [95% Conf. Interval]
---------------+----------------------------------------------------------------
lit_risk | .001018 .0005239 1.94 0.053 -.0000123 .0020484
size | .7397585 .0579766 12.76 0.000 .6257322 .8537848
mtb | .0549462 .0131649 4.17 0.000 .0290541 .0808384
lev | -.6847657 .2475307 -2.77 0.006 -1.1716 -.197931
nwc | -1.357777 .2877874 -4.72 0.000 -1.923787 -.7917672
rd | -.2639219 .1092408 -2.42 0.016 -.4787728 -.0490709
growth | -.2644579 .1528391 -1.73 0.084 -.5650565 .0361408
cf | -.0113674 .286946 -0.04 0.968 -.5757228 .5529879
cf_vol_5y | 1.987609 .7245799 2.74 0.006 .5625311 3.412688
industry_sigma | 6.153141 2.241524 2.75 0.006 1.744591 10.56169
acq | -2.433709 .2453183 -9.92 0.000 -2.916193 -1.951226
capex | -3.205605 .8809773 -3.64 0.000 -4.93828 -1.47293
ndi | 1.518168 .2765364 5.49 0.000 .9742856 2.06205
nei | .7939962 .2483272 3.20 0.002 .3055949 1.282398
div | .0180821 .0712251 0.25 0.800 -.122001 .1581652
|
sic |
1311 | 0 (omitted)
1381 | 0 (omitted)
1389 | 0 (omitted)
1400 | 0 (omitted)
1531 | 0 (omitted)
1600 | 0 (omitted)
1731 | 0 (omitted)
2000 | 0 (omitted)
2011 | 0 (omitted)
2030 | 0 (omitted)
2033 | 0 (omitted)
2040 | 0 (omitted)
2052 | 0 (omitted)
2060 | 0 (omitted)
2070 | 0 (omitted)
2080 | 0 (omitted)
2082 | 0 (omitted)
2085 | 0 (omitted)
2086 | 0 (omitted)
2090 | 0 (omitted)
2111 | 0 (omitted)
2273 | 0 (omitted)
2300 | 0 (omitted)
2320 | 0 (omitted)
2400 | 0 (omitted)
2430 | 0 (omitted)
2510 | 0 (omitted)
2621 | 0 (omitted)
2631 | 0 (omitted)
2650 | 0 (omitted)
2670 | 0 (omitted)
2810 | 0 (omitted)
2820 | 0 (omitted)
2821 | 0 (omitted)
2834 | 0 (omitted)
2835 | 0 (omitted)
2836 | 0 (omitted)
2840 | 0 (omitted)
2842 | 0 (omitted)
2844 | 0 (omitted)
2851 | 0 (omitted)
2860 | 0 (omitted)
2870 | 0 (omitted)
2911 | 0 (omitted)
3011 | 0 (omitted)
3021 | 0 (omitted)
3081 | 0 (omitted)
3100 | 0 (omitted)
3312 | 0 (omitted)
3411 | 0 (omitted)
3420 | 0 (omitted)
3430 | 0 (omitted)
3490 | 0 (omitted)
3510 | 0 (omitted)
3511 | 0 (omitted)
3523 | 0 (omitted)
3531 | 0 (omitted)
3533 | 0 (omitted)
3540 | 0 (omitted)
3559 | 0 (omitted)
3560 | 0 (omitted)
3561 | 0 (omitted)
3570 | 0 (omitted)
3572 | 0 (omitted)
3576 | 0 (omitted)
3577 | 0 (omitted)
3585 | 0 (omitted)
3620 | 0 (omitted)
3630 | 0 (omitted)
3663 | 0 (omitted)
3674 | 0 (omitted)
3678 | 0 (omitted)
3679 | 0 (omitted)
3711 | 0 (omitted)
3714 | 0 (omitted)
3721 | 0 (omitted)
3724 | 0 (omitted)
3728 | 0 (omitted)
3730 | 0 (omitted)
3751 | 0 (omitted)
3760 | 0 (omitted)
3812 | 0 (omitted)
3823 | 0 (omitted)
3825 | 0 (omitted)
3826 | 0 (omitted)
3827 | 0 (omitted)
3841 | 0 (omitted)
3842 | 0 (omitted)
3843 | 0 (omitted)
3844 | 0 (omitted)
3845 | 0 (omitted)
3851 | 0 (omitted)
3942 | 0 (omitted)
3944 | 0 (omitted)
3990 | 0 (omitted)
4011 | 0 (omitted)
4210 | 0 (omitted)
4213 | 0 (omitted)
4225 | 0 (omitted)
4400 | 0 (omitted)
4512 | 0 (omitted)
4513 | 0 (omitted)
4700 | 0 (omitted)
4731 | 0 (omitted)
4812 | 0 (omitted)
4813 | 0 (omitted)
4841 | 0 (omitted)
4888 | 0 (omitted)
4899 | 0 (omitted)
5000 | 0 (omitted)
5010 | 0 (omitted)
5013 | 0 (omitted)
5047 | 0 (omitted)
5122 | 0 (omitted)
5140 | 0 (omitted)
5200 | 0 (omitted)
5211 | 0 (omitted)
5311 | 0 (omitted)
5331 | 0 (omitted)
5399 | 0 (omitted)
5411 | 0 (omitted)
5500 | 0 (omitted)
5531 | 0 (omitted)
5600 | 0 (omitted)
5651 | 0 (omitted)
5661 | 0 (omitted)
5731 | 0 (omitted)
5812 | 0 (omitted)
5912 | 0 (omitted)
5944 | 0 (omitted)
5961 | 0 (omitted)
5990 | 0 (omitted)
7011 | 0 (omitted)
7200 | 0 (omitted)
7311 | 0 (omitted)
7323 | 0 (omitted)
7340 | 0 (omitted)
7350 | 0 (omitted)
7363 | 0 (omitted)
7370 | 0 (omitted)
7372 | 0 (omitted)
7373 | 0 (omitted)
7374 | 0 (omitted)
7389 | 0 (omitted)
7841 | 0 (omitted)
7990 | 0 (omitted)
8062 | 0 (omitted)
8071 | 0 (omitted)
8090 | 0 (omitted)
8700 | 0 (omitted)
8721 | 0 (omitted)
8731 | 0 (omitted)
8742 | 0 (omitted)
|
year |
2011 | -.0442112 .0304748 -1.45 0.148 -.104148 .0157256
2012 | .0400003 .0355404 1.13 0.261 -.0298994 .1099
2013 | .0454666 .0405875 1.12 0.263 -.0343595 .1252927
2014 | .0194234 .0475414 0.41 0.683 -.0740794 .1129263
2015 | -.0739048 .0506218 -1.46 0.145 -.1734661 .0256564
2016 | -.0041762 .051068 -0.08 0.935 -.104615 .0962627
2017 | -.0587983 .0542472 -1.08 0.279 -.1654898 .0478933
2018 | -.2163473 .0594791 -3.64 0.000 -.3333286 -.099366
|
_cons | .0836588 .5586551 0.15 0.881 -1.015084 1.182402
---------------+----------------------------------------------------------------
sigma_u | .9933031
sigma_e | .48230923
rho | .80921242 (fraction of variance due to u_i)
--------------------------------------------------------------------------------

. dataex
input statement exceeds linesize limit. Try specifying fewer variables
r(1000);

. help dataex

.

I would appreciate help on how to best handle this problem. Do I understand right that if I clustered standard errors at industry level that would mean that I'm including industry fixed effects? And since year was my time variable in xtset I'm also including year fixed effects? However, I'm following the paper of Malm and Kanuri (2016) where they included both industry and fixed effects but clustered standard errors at firm level (id variable in my case). Therefore I would prefer to use this specification - that is cluster at firm level, and then add i.year i.industry to my xtreg command.

(I would also appreciate help on how to use dataex. Even when I used only the outputs for xtset and xtreg - first two commands - dataext said they exceed the limit)

Thank you.