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Signaling, Instrumentation, and CFO Decision-Making

Author

Listed:
  • Gilles Chemla

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Christopher A. Hennessy

    (London Business School - London Business School)

Abstract

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.

Suggested Citation

  • Gilles Chemla & Christopher A. Hennessy, 2021. "Signaling, Instrumentation, and CFO Decision-Making," Post-Print hal-03383760, HAL.
    • Handle: RePEc:hal:journl:hal-03383760
    as

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