Signaling, Instrumentation, and CFO Decision-Making

Gilles Chemla and Christopher A. Hennessy
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Gilles Chemla: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Christopher A. Hennessy: London Business School - London Business School

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Abstract: Building parable economies embedding econometricians, we view alternative estimators (IV, fuzzy RD, natural experiments, OLS, event studies) from the perspective of privately-informed decision-makers, e.g. CFOs. IV 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 the utility of alternative estimators hinges upon oft-neglected assumptions about agent/econometrician information sets, as distinct from exclusion restrictions. We recommend parable economy estimation as precursor to real-world IV estimation.

Keywords: signal; selection; instrumental variables; fuzzy regression discontinuity design; experiments; corporate finance; government policy (search for similar items in EconPapers)
Date: 2021
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Published in Journal of Financial Economics, 2021

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03383760

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