Dear Community,

for my master thesis I am conducting a Difference-in-Differences-Analysis. More specifically, I am investigating if a policy change at the beginning of the year 2017 has a treatment effect on my treatment group.

I am using panel data with a total of 204 firms over a period of 5 years (2015 - 2019). I constructed a balanced sample with a control and treatment group of equal size (each group has 102 firms in it). The years 2015 and 2016 constitute my Pre-Period, while the years 2017-2019 belong to the Post-Period.

In order to arrive at my DiD estimator I estimated the following regression using a two-way fixed effects model:

Code:
 xtreg y TreatPost x1 x2 ... xk Yr2-Yr5, fe i(ID)
  • Yr2-Yr5 represent Dummy-Variables in order to capture the year fixed effects
  • The option fe i(ID) are the firm fixed effects, where ID is the identifier for my firms
With these settings I arrive at the following R2. I read through other posts concerning the interpretation of the three R2 measures. As far as I understood, the within R2 shows the amount of variability in my dependant variable that can be explained by my explanatory variables within each unit (or firm in my case). On the other hand the between R2 shows me how much of the variability between indivdual firms can be explained.
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I was a worried about the relatively low R2, which is why I wanted to cross-check the results with a "normal" regression using the following command:

Code:
 reg y TreatPost x1 x2 ... xk i.year i.ID
As far as I know this code does the exact same thing as the xtreg-command above, but simply does it manually. The i.year-command generates four dummy variables controlling for the year fixed effects, while the command i.ID generates a Dummy for each of the firms in my sample, thus controlling for the firm fixed effects.

As expected, both codes give me the exact same coefficients for my explanatory variables as well as the same standard errors and signifiance levels. So far, so good, however, with the second command ("normal" reg) I arrive at a much higher R2.
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Therefore, I am a bit confused why the R2 in the second regression is so much higher than in the first one. My guess is that the xtreg-command only takes into account the explanatory power of the "real" regressors (without the fixed effects), while the reg-command takes also into account the explanatory power of the fixed effects....however, I am quite unsure about such an interpretation.


It would be great if someone could enlighten me and tell me the differences between the R2 measures and which one should be reported in my thesis.

Thank you very much in advance!