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  • Checking parallel trends

    Hi everyone, I need your precious help to check parallel trends assumption. I am studying the impact of a directive on cash holdings of firms. I tried to generate the parallel trends graph but my Professor is not convinced about the results. I launched the following commands on Stata, with NFRD which is 0 when the directive does not apply for a company and 1 when the directive applies for a company; dummyT which is an indicator for whether or not the Directive has been established:


    egen sumtreat = sum(NFRD), by(CompanyName)

    gen Treated = sumtreat > 0

    generate InteractionDID = dummyT*NFRD

    drop sumtreat




    preserve

    collapse (mean) CashandEquivalents, by(Treated YEAR)

    reshape wide CashandEquivalents, i(YEAR) j(Treated)

    graph twoway connect CashandEquivalents* YEAR

    restore




    could you please tell me if the procedure is the correct one?

    Thanks a lot for the responses!

  • #2
    ssc install lgraph
    lgraph CashandEquivalents year, by(Treated)

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    • #3
      Thanks George,
      the graph that I obtain is the same that I obtain using my formulas, so I hope they are right. Is there another possibility of checking trend by using a regression? Or how can I do an event study?

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      • #4
        prior to treatment, you can regress ln(outcome) on year with interaction treated*year. see if growth rates differ by much. growth would need to be relatively stable and linear'ish.

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        • #5
          Hi George,
          just so understand, I should create a variable called lnCash which is the ln(CashandEquivalents) and then launch xtreg ln(CashandEquivalents) YEAR Interaction if the Year is < then the first year of treatment?
          By the way the treatment year is different in some countries, so I should just check the year before any treatment right?

          Thanks for the help!

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          • #6
            you just need to compute a growth rate and the differential for the treated units in the pre-treatment period.

            ln(y) = a0 + a1*year + a2*treat*year

            could use fixed effects to center.

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