Policy Heterogeneity in Empirical Corporate Finance
Cornell University; National Bureau of Economic Research (NBER)
University of Iowa
University of Kansas - Department of Economics
November 15, 2013
Standard econometric methods can overlook the issue of heterogeneity in corporate policy making, generating biased estimates. We propose ways to identify and address the firm policy heterogeneity bias in practice. In doing so, we introduce a new test determining whether standard firm-fixed effects estimations are subject to heterogeneity biases in corporate applications. Examining investment models to showcase our approach, we show that heterogeneity bias-robust methods identify cash flow as a more important driver of investment than previously reported. Our study demonstrates analytically, via simulations, and empirically the importance of carefully accounting for firm heterogeneity in drawing conclusions about corporate policy.
Number of Pages in PDF File: 56
Keywords: fixed effects, estimation, slope heterogeneity
JEL Classification: G31, C23
Date posted: April 14, 2013 ; Last revised: December 17, 2014
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