Seminar 217, Risk Management: The Ratio Problem

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Submitted by Brandon Eltiste on July 16, 2019
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Location:
1011 Evans Hall
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Time:
Tuesday, November 19, 2019 - 11:00
About this Event

Speaker: Frank Partnoy, UC Berkeley

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.