Threshold Events and Identification: A Study of Cash Shortfalls

Tor‐erik Bakke and Toni Whited

Journal of Finance, 2012, vol. 67, issue 3, 1083-1111

Abstract: Threshold events are discrete events triggered when an observable continuous variable passes a known threshold. We demonstrate how to use threshold events as identification strategies by revisiting the evidence in Rauh (2006, Investment and financing constraints: Evidence from the funding of corporate pension plans, Journal of Finance 61, 33–71) that mandatory pension contributions cause investment declines. Rauh's result stems from heavily underfunded firms that constitute a small fraction of the sample and that differ sharply from the rest of the sample. To alleviate this issue, we use observations near funding thresholds and find causal effects of mandatory contributions on receivables, R&D, and hiring, but not on investment. We also provide useful suggestions and diagnostics for analyzing threshold events.

Date: 2012
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https://doi.org/10.1111/j.1540-6261.2012.01742.x

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