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Signaling, Random Assignment, and Causal Effect Estimation

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  • Chemla, Gilles
  • Hennessy, Christopher

Abstract

Causal evidence from random assignment has been labeled "the most credible." We argue it is generally incomplete in finance/economics, omitting central parts of the true empirical causal chain. Random assignment, in eliminating self-selection, simultaneously precludes signaling via treatment choice. However, outside experiments, agents enjoy discretion to signal, thereby caus- ing changes in beliefs and outcomes. Therefore, if the goal is informing discretionary decisions, rather than predicting outcomes after forced/mistaken actions, randomization is problematic. As shown, signaling can amplify, attenuate, or reverse signs of causal e¤ects. Thus, traditional methods of empirical finance, e.g. event studies, are often more credible/useful.

Suggested Citation

  • Chemla, Gilles & Hennessy, Christopher, 2020. "Signaling, Random Assignment, and Causal Effect Estimation," CEPR Discussion Papers 15175, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:15175
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Signal; Random assignment; Causal effect; Selection; investment; Corporate finance; Ceo; Household finance; Government policy;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G3 - Financial Economics - - Corporate Finance and Governance
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

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