ABSTRACT
This chapter discusses differences between the multiple and the simple linear regression models and net effects and confounding effects. It describes estimation bias due to correlated-omitted variables and model selection by the General-to-Simple approach. The chapter argues why the simple regression model might produce biased estimates and how the multiple regression model can correct the bias. One of the most widely employed approach to model selection is known as the “General-to-Simple Approach.” The idea of this approach is to find a simple model which does not omit any significant variables. Remember that any omission of significant variables will cause an estimation bias. Weak corporate governance has frequently been cited as one of the causes of the East Asian financial crisis of 1997–1998. To measure firm performance during the crisis, Mitton uses stock returns over the crisis period, from July 1997 through August 1998.
