Hi Statalist Forum,
I am currently writing my Master's Thesis about whether portfolio companies of private equity ("PE") funds outperform relevant control firms matched on five criteria.
Based on the empirical literature in the area, we have tested the following model in STATA:
Y = B0 + B1*D1*Post + B2*Size + B3*Age + B4*Industry
Where Y is the dependent variable, i.e. one of the financial performance measures, and D1 is a dummy variable with a value of 1 if the firm is acquired by a PE fund and 0 if the firm is not acquired and thus part of the control group. The term Post is a dummy variable for time, which is 0 if the observation is before the acquisition and 1 if the observation is after the acquisition. Consequently, B1 is the difference-in-differences estimator. Size, Age and Industry are included as control variables.
Having looked in other forums here at Statalist, it seems as if a time indicator, i.e. + Post*B5, is often included in the regression in Stata so that the equation would instead become:
Y = B0 + B1*D1*Post + B2*Size + B3*Age + B4*Industry + B5*Post
However, as most research in this area does not include the time indicator, I would like to hear what the "correct" approach would be? Is it "wrong" to leave out the time indicator? And what is the exact difference in the interpretation of the results if including/excluding the time indicator?
I can see that if I include the time indicator, the difference-in-differences estimator will change in some of the tests in STATA, and therefore I would really appreciate any thoughts on the above-mentioned issue.
Best Regards,
James
I am currently writing my Master's Thesis about whether portfolio companies of private equity ("PE") funds outperform relevant control firms matched on five criteria.
Based on the empirical literature in the area, we have tested the following model in STATA:
Y = B0 + B1*D1*Post + B2*Size + B3*Age + B4*Industry
Where Y is the dependent variable, i.e. one of the financial performance measures, and D1 is a dummy variable with a value of 1 if the firm is acquired by a PE fund and 0 if the firm is not acquired and thus part of the control group. The term Post is a dummy variable for time, which is 0 if the observation is before the acquisition and 1 if the observation is after the acquisition. Consequently, B1 is the difference-in-differences estimator. Size, Age and Industry are included as control variables.
Having looked in other forums here at Statalist, it seems as if a time indicator, i.e. + Post*B5, is often included in the regression in Stata so that the equation would instead become:
Y = B0 + B1*D1*Post + B2*Size + B3*Age + B4*Industry + B5*Post
However, as most research in this area does not include the time indicator, I would like to hear what the "correct" approach would be? Is it "wrong" to leave out the time indicator? And what is the exact difference in the interpretation of the results if including/excluding the time indicator?
I can see that if I include the time indicator, the difference-in-differences estimator will change in some of the tests in STATA, and therefore I would really appreciate any thoughts on the above-mentioned issue.
Best Regards,
James
