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Signaling, Random Assignment, and Causal Effect Estimation

Chemla, Gilles; Hennessy, Christopher A. (2021), Signaling, Random Assignment, and Causal Effect Estimation, PHDBA 239S Finance Seminars 2021, 2021-03, Berkeley / Online, United States

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Hennessy,Chemla2021.pdf (330.5Kb)
Type
Communication / Conférence
Date
2021
Conference title
PHDBA 239S Finance Seminars 2021
Conference date
2021-03
Conference city
Berkeley / Online
Conference country
United States
Metadata
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Author(s)
Chemla, Gilles
Dauphine Recherches en Management [DRM]
Hennessy, Christopher A.
London Business School
Abstract (EN)
Evidence from quasi-random assignment (e.g. natural experiments, IV, and RDD) has been labeled ìthe most credible. We argue such causal evidence is often misleading in finance/economics,omitting a key component of the true empirical causal effect. Random assignment, in eliminating self-selection, simultaneously precludes signaling via treatment choice. However, outside experiments, agents enjoy discretion to signal, thereby causing changes in beliefs and outcomes.Therefore, if the goal is informing discretionary decisions, rather than predicting outcomes afterforced/mistaken actions, randomization is problematic. As shown, signaling amplifies, attenuates, or reverses signs of causal effects. Thus, traditional empirical finance methods, e.g. event studies, are often more credible/useful.
Subjects / Keywords
Corporate Finance; Government Policy; household finance; investment; selection
JEL
D82 - Asymmetric and Private Information; Mechanism Design
G14 - Information and Market Efficiency; Event Studies; Insider Trading
G18 - Government Policy and Regulation
J24 - Human Capital; Skills; Occupational Choice; Labor Productivity

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