Signaling, Random Assignment, and Causal Effect Estimation

Gilles Chemla and Christopher Hennessy

No 15175, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Causal evidence from random assignment has been labeled "the most credible." We argue it is generally incomplete in finance/economics, omitting central parts of the true empirical causal chain. Random assignment, in eliminating self-selection, simultaneously precludes signaling via treatment choice. However, outside experiments, agents enjoy discretion to signal, thereby caus- ing changes in beliefs and outcomes. Therefore, if the goal is informing discretionary decisions, rather than predicting outcomes after forced/mistaken actions, randomization is problematic. As shown, signaling can amplify, attenuate, or reverse signs of causal e¤ects. Thus, traditional methods of empirical finance, e.g. event studies, are often more credible/useful.

Keywords: Signal; Random assignment; Causal effect; Selection; investment; Corporate finance; Ceo; Household finance; Government policy (search for similar items in EconPapers)
JEL-codes: D82 E6 G14 G18 G28 G3 J24 (search for similar items in EconPapers)
Date: 2020-08
New Economics Papers: this item is included in nep-ecm and nep-mac
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