Signaling, instrumentation, and CFO decision-making

Christopher A. Hennessy and Gilles Chemla

Journal of Financial Economics, 2022, vol. 144, issue 3, 849-863

Abstract: 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.

Keywords: Selection; IV; RD; Experiments; Causal effect (search for similar items in EconPapers)
JEL-codes: C2 D8 G3 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:144:y:2022:i:3:p:849-863

DOI: 10.1016/j.jfineco.2021.07.014

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