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Spillover Effects in Empirical Corporate Finance: Choosing the Proxy for the Treatment Intensity

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  • Fabiana Gomez
  • David Pacini

Abstract

The existing literature indicates that spillovers lead to a complicated bias in the estimation of treatment effects in empirical corporate finance. We show that, under simple random treatment assignment, such a complicated bias is simplified if the proxy chosen for the group-level treatment intensity is the leave-one-out average treatment. This choice brings two advantages: first, it facilitates the diagnosis of the bias and, second, it facilitates the interpretation of the average spillover effect on the treated. These two advantages justify the use of the leave-one-out average treatment as the preferred proxy for the treatment intensity. We illustrate these advantages in the context of measuring the effect of credit supply contractions on firms’ employment decisions.

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  • Fabiana Gomez & David Pacini, 2022. "Spillover Effects in Empirical Corporate Finance: Choosing the Proxy for the Treatment Intensity," Bristol Economics Discussion Papers 22/766, School of Economics, University of Bristol, UK.
    • Handle: RePEc:bri:uobdis:22/766
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    References listed on IDEAS

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    1. Kilian Huber, 2018. "Disentangling the Effects of a Banking Crisis: Evidence from German Firms and Counties," American Economic Review, American Economic Association, vol. 108(3), pages 868-898, March.
    2. Chesher, Andrew, 1989. "Hajek Inequalities, Measures of Leverage and the Size of Heteroskedasticity Robust Wald Tests," Econometrica, Econometric Society, vol. 57(4), pages 971-977, July.
    3. Biswas, Sonny & Zhai, Wei, 2021. "Economic policy uncertainty and cross-border lending," Journal of Corporate Finance, Elsevier, vol. 67(C).
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