How to choose instruments in GMM-dif

[Michele Rossi]

Hi,
I'm new on this forum and I'm looking for your help. I'm trying to carry out an analysis on a dynamic panel. My model is an ECM in which pecking-order and trade-off theory are nested. The dependent variable is the short debt asset ratio. The model is:
ΔY_it=Л_it’X_it + α_it(Y_it-1-Y_it-1*) + a_i + τ_t + ε_it

My questions are:

1. in the beginning, when I run Random Effect model I have, as result, a theta distribution that collapse to zero. Why? Maybe my regressors are endogenous or fixed effects don't matter?
2. How can I select my instruments for endogenous variables in GMM- dif model i.e. how can I understand if an instrument is relevant and exogemous? And how can I verify the correct specification of the model?

Waiting for your replay, I thank you in advance for your attention.

[Michele Rossi]

Is there anyone that can help me?

[Jesse Wursten]

I think your question is both too broad and too vague to be answered. I personally have no idea what "pecking-order" and "trade-off" theory is or how that relates to short debt asset ratios.