Good afternoon everyone, I am in the final stages of my thesis and am currently questioning my choice of control variables.
I am investigating the impact of an existence of tax loss carryforwards on deal year returns of target companies using a DiD approach.
The problem with my control variables such as firm size or e.g. leverage ratio is that all these variables could change after the treatment, especially in the treatment group, due to the treatment (as firms turn these "screws" to maximize the exploitation of loss carryforwards).
Generally speaking: Is it always a mistake to include control variables that could be affected by the treatment? In my setting, I should not include control variables, because it is uncertain which measures are taken by the companies to increase the returns. It could be actions that increase the balance sheet (firm size) by raising new capital for example. Unfortunately, for orientation, no papers exist that address my topic in particular. Should I rather omit all control variables and work exclusively with fixed effects? I have never seen a study that does not use any control variables at all....
My regression equation is just as follows:
Yield =ß0+ß1year + ß2group + ß3*i.year##i.group+ß*Controls+FE+ε
Controls: firm size, fixed asset ratio, intangible ratio, leverage
Thank you very much and kind regards,
Lenny
I am investigating the impact of an existence of tax loss carryforwards on deal year returns of target companies using a DiD approach.
The problem with my control variables such as firm size or e.g. leverage ratio is that all these variables could change after the treatment, especially in the treatment group, due to the treatment (as firms turn these "screws" to maximize the exploitation of loss carryforwards).
Generally speaking: Is it always a mistake to include control variables that could be affected by the treatment? In my setting, I should not include control variables, because it is uncertain which measures are taken by the companies to increase the returns. It could be actions that increase the balance sheet (firm size) by raising new capital for example. Unfortunately, for orientation, no papers exist that address my topic in particular. Should I rather omit all control variables and work exclusively with fixed effects? I have never seen a study that does not use any control variables at all....
My regression equation is just as follows:
Yield =ß0+ß1year + ß2group + ß3*i.year##i.group+ß*Controls+FE+ε
Controls: firm size, fixed asset ratio, intangible ratio, leverage
Thank you very much and kind regards,
Lenny
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