An Empirical Assessment of Empirical Corporate Finance
Coles, J.L. and Li, Z.F. 2021 forthcoming. An Empirical Assessment of Empirical Corporate Finance. Journal of Financial and Quantitative Analysis forthcoming.
66 Pages Posted: 15 Mar 2012 Last revised: 13 Apr 2022
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An Empirical Assessment of Empirical Corporate Finance
An Empirical Assessment of Empirical Corporate Finance
Date Written: February 1, 2022
Abstract
We empirically evaluate 20 prominent contributions to a broad range of areas in the empirical corporate finance literature. We assemble the necessary data and apply a single, simple econometric method—the connected groups approach of Abowd, Karmarz, and Margolis (1999)—to appraise the extent to which prevailing empirical specifications explain variation of the dependent variable, differ in composition of fit arising from various classes of independent variables, and exhibit resistance to omitted variable bias and other endogeneity problems.
Observed firm characteristics do best in explaining market leverage, cash holdings, CEO pay level, and accounting performance, and worst in takeover defenses and outcomes, some board characteristics, and firm value (per Tobin’s Q). Observed manager characteristics have relatively high power to explain CEO contract design and low power for firm focus and investment policy. Unobserved manager attributes deliver a high proportion of explained variation in the dependent variable for compensation contract design and aspects of board structure, while unobserved firm attributes provide a high proportion of variation explained for dividend payout, antitakeover defenses, book leverage, and corporate cash holdings. Including manager and firm fixed effects, along with firm and manager observables, delivers the highest adjusted R2 for dividend payout, the propensity to adopt antitakeover defenses, firm risk, and cash holdings. In all 20 areas in corporate finance, including manager and firm fixed effects significantly alters inference on primary explanatory variables.
Keywords: Empirical corporate finance, Corporate governance, Capital structure, Dividend policy, Executive compensation, Delta, Vega, Corporate control, Antitakeover protections, Mergers and acquisitions, Board of directors, Leverage, Cash balances, Investment policy, Asset composition, Firm focus, R&D
JEL Classification: G3, G30, G31, G32, G34, G35, C23, C58, J31, J33
Suggested Citation: Suggested Citation
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