Hello,

If have got an ecometric question regarding the 2sls approach.

Is it appropriate to use a variable as instrument which is highly correlated to an control variable?

In my case i have the following regression: xtivreg2 TobinsQ (instiutionalholding = tradingvolume, commonsharesoutstanding) firm size debtassetratio r&d sales current ratio i.country i.year i.industry, fe robust

My question regards to the connection between commonsharesoutstanding and firm size which are highly correlated, about 0.86, is this an issue?


Best regards


John Marburg