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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.

Suggested Citation

  • 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.
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    3. 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.
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