Signaling, instrumentation, and CFO decision-making

Building parable economies embedding econometricians, we view alternative estimators (Instrumental variables, fuzzy regression discontinuity, natural experiments, OLS, event studies) from the perspective of privately informed decision-makers, e.g., CFOs. Instrumental variable estimates can be mislea...

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Bibliographic Details
Published in:Journal of financial economics 2022-06, Vol.144 (3), p.849-863
Main Authors: Hennessy, Christopher A., Chemla, Gilles
Format: Article
Language:English
Subjects:
Causal effect
Chief financial officers
Decision makers
Decision making
Discontinuity
Econometrics
Estimating techniques
Experiments
Regression analysis
Selection
Signaling
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Summary:Building parable economies embedding econometricians, we view alternative estimators (Instrumental variables, fuzzy regression discontinuity, natural experiments, OLS, event studies) from the perspective of privately informed decision-makers, e.g., CFOs. Instrumental variable estimates can be misleading since randomization through observable instruments eliminates signal content arising from discretion. If the goal is informing discretionary decisions, rather than predicting outcomes after forced/mistaken actions, instrumentation is problematic, whereas OLS or event studies can be sufficient. The analysis shows that the utility of alternative estimators hinges upon often neglected assumptions about agent/econometrician information sets, as distinct from exclusion restrictions. We recommend parable economy estimation before real-world IV estimation.
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2021.07.014