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Should I include year effects in my regression?

  • 1.  Should I include year effects in my regression?

    Posted Tue June 28, 2022 04:37 PM
    I made the following logistic regression model for my master's thesis.
    FAIL= LATE + SIZE + AGE + EQUITY + PROF + SOLV + LIQ + IND.
    Where I take a look if late filing of financial statements (independent variable) is an indicator of failure of small companies (dependent variable). FAIL is a dummy variable that is equal to 1 when a company failed during one of the researched years. I use data covering 3 years (2017, 2018 en 2019). Should I include a dummy variable YEAR, to account for year effects, or not. I have searched online but I don't understand what it exactly means and that is why I don't know if it is necessary to include it in this regression model. I hope you guys can help me.
    Thank you in advance!


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    Tom Raemdonck
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    #SPSSStatistics


  • 2.  RE: Should I include year effects in my regression?

    IBM Champion
    Posted Tue June 28, 2022 05:15 PM
    Well, no, you would not include a single year variable unless you believe that there is a linear trend for year, but you might include year as a factor, which would allow for there to be a year effect but not necessarily a linear one.

    The bigger question is whether the equation shifts over time in a way that would distort the estimated effect of other independent variables that happen also to move over years.  In fact, you could even include year interaction terms, or you could include year as a random effect  (Google around for fixed vs random effects).

    So there are many ways to allow for year effects that might bias the estimates of the effect of other independent variables.  So, try it and see if it affects your conclusions about the variables that you care about.

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