Signaling, instrumentation, and CFO decision-making

Hennessy, C and Chemla, G (2022) Signaling, instrumentation, and CFO decision-making. Journal of Financial Economics, 144 (3). pp. 849-863. ISSN 0304-405X OPEN ACCESS


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.

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Item Type: Article
Subject Areas: Finance
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© 2022 Elsevier. This manuscript version is made available under the CC-BY-NC-NC licence

Date Deposited: 25 Jan 2022 15:58
Date of first compliant deposit: 25 Jan 2022
Subjects: Financial management
Statistical decision making
Mathematical models
Last Modified: 01 Sep 2023 07:01

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