Dear statistics community,
I am running a model in Stata of the following form:
xtset CompanyID Year, yearly
xtreg firm_profitability firm_investment_strategy firm_size, fe vce(robust)
I would now like to add industry fixed effects to my model, to control for industry difference (a dummy for each 2-digit SIC industry: using i.SIC).
However, there seem to be some problems with that. All the estimates for the industry SIC dummies are omitted in Stata:
note: 7.SIC omitted because of collinearity
...
7 | 0 (omitted)
I am wondering why this is the case:
Might it have to do with using fixed effects regression? The dummies for the SIC industries are time-invariant, they don't change over time.
Any idea what one might do, so that I can control for different industry effects by including industry-fixed effects?
Including industry-fixed effects seems to be a very common thing in strategic management research. I would be quite surprised if there was no way to use it when using FE regression.
(Isn't FE normally said to be the much "safer" choice? As compared to an RE regression — as RE makes additional statistical assumptions that need to be satisfied to run a proper model. So wouldn't it be weird if there was no way to include using industry-fixed effects in the standard estimation method of FE estimation?)
Thanks a lot!
Franz
Best Answer
If SIC dummies do not change over time for a given CompanyID, then your CompanyID FE are linearly dependent with the SIC FE. That is, adding the SIC FE would not provide any additional information, because the effect of the CompanyID FE already captures any time-invariant effect, including the SIC FE.
Therefore, you are already implicitely controlling for SIC FE by controlling for SIC FE.