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Frank Partnoy, UC Berkeley: The Ratio Problem

November 19, 2019 @ 11:00 am - 12:30 pm

ABSTRACT: We describe two problems – omitted variable bias and measurement error – that arise when a ratio is the dependent variable in a linear regression. First, we show how bias can arise from the omission of two variables based on a ratio’s denominator, and we describe tests for the degree of bias. As an example, we show that the familiar “inverse U” relationship between managerial ownership and Tobin’s Q is reversed when omitted variables are included. Second, we show how measurement error in the ratio denominator can lead to bias. We urge caution about using ratios as dependent variables.

Working paper


November 19, 2019
11:00 am - 12:30 pm
Event Category:


1011 Evans Hall
1011 Evans Hall
Berkeley, CA 94720 United States