Dear all,

I would like to ask a question about using an interaction term in a two-way fixed panel regression (year fixed effects and industry fixed effects).

Using a panel data from 2005 to 2020, I am trying to measure (1) if auditors charge more fees to the clients following a data breach and (2) if the level of response varies over time.

I came up with the following model, but I am not sure using the interaction variable (Breach*Year dummy) is a right choice.

Y = B0 + B1 * Breach + B2 * (Breach * Year dummy) + Controls + Year_FE + Industry_FE

where
  • Y = Natural log of audit fees charged to a firm in year t
  • Breach = 1 if a firm reported a data breach in year t, 0 otherwise
  • Breach*Year dummy = Year-specific effect variable
  • Controls = A group of control variables, such as firm size, profitability, etc.
  • Year_FE = Year-fixed effect
  • Industry_FE = Industry-fixed effect
In my understanding,
  • B1(Breach) measures the effect of data breach on audit fees
  • B2(Breach*Year dummy) measures if the effect of B1 changes over time or if any "year-specific" effect
Nonetheless, I cannot confirm if it is the right model for measuring the year-specific effect. I looked over Wooldridge (2016) but could not find a similar model.

Could anyone please comment on this model please? Any suggestion would be much appreciated.