Spillover Effects in Empirical Corporate Finance: Choosing the Proxy for the Treatment Intensity

Fabiana Gomez and David Pacini

Bristol Economics Discussion Papers from School of Economics, University of Bristol, UK

Abstract: The existing literature indicates that spillovers lead to a complicated bias in the estimation of treatment effects in empirical corporate finance. We show that, under simple random treatment assignment, such a complicated bias is simplified if the proxy chosen for the group-level treatment intensity is the leave-one-out average treatment. This choice brings two advantages: first, it facilitates the diagnosis of the bias and, second, it facilitates the interpretation of the average spillover effect on the treated. These two advantages justify the use of the leave-one-out average treatment as the preferred proxy for the treatment intensity. We illustrate these advantages in the context of measuring the effect of credit supply contractions on firms’ employment decisions.

Date: 2022-05-23
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