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Signaling, Instrumentation, and CFO Decision-Making

Chemla, Gilles; Hennessy, Christopher A. (2021), Signaling, Instrumentation, and CFO Decision-Making, Journal of Financial Economics. 10.1016/j.jfineco.2021.07.014

Type
Article accepté pour publication ou publié
Date
2021
Journal name
Journal of Financial Economics
Publisher
Elsevier
Publication identifier
10.1016/j.jfineco.2021.07.014
Metadata
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Author(s)
Chemla, Gilles
Dauphine Recherches en Management [DRM]
Hennessy, Christopher A.
London Business School
Abstract (EN)
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.
Subjects / Keywords
signal; selection; instrumental variables; fuzzy regression discontinuity design; experiments; corporate finance; government policy
JEL
D82 - Asymmetric and Private Information; Mechanism Design
G14 - Information and Market Efficiency; Event Studies; Insider Trading
G18 - Government Policy and Regulation
G30 - General
J24 - Human Capital; Skills; Occupational Choice; Labor Productivity

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