Journal of Financial Economics Vol. 144 No. 3 2022
Signaling, instrumentation, and CFO decision-making
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.
- DOI
- 10.1016/j.jfineco.2021.07.014
- Volume
- 144
- Issue
- 3
- Pages
- 849-863
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref