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Threshold Events and Identification: A Study of Cash Shortfalls

Journal of Finance, Forthcoming

43 Pages Posted: 28 May 2010 Last revised: 28 Nov 2011

Tor-Erik Bakke

University of Oklahoma - Division of Finance

Toni M. Whited

University of Michigan, Stephen M. Ross School of Business; National Bureau of Economic Research

Date Written: May 27, 2010

Abstract

Threshold events are discrete events triggered when an observable continuous variable passes a known threshold. We demonstrate how to use threshold events as identification strategies by revisiting the evidence in Rauh (2006) that mandatory pension contributions cause investment declines. Rauh's result stems from heavily underfunded firms that constitute a small fraction of the sample and that differ from the rest of the sample in important ways; that is, the control group differs from the treated group. To alleviate this issue, we use observations near funding thresholds and find causal effects of mandatory contributions on receivables, R&D, and hiring, but not on investment. We also provide useful suggestions and diagnostics for analyzing threshold events.

Keywords: Investment, Regression Discontinuity, Threshold Events

JEL Classification: G31, G32, G35

Suggested Citation

Bakke, Tor-Erik and Whited, Toni M., Threshold Events and Identification: A Study of Cash Shortfalls (May 27, 2010). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1616720 or http://dx.doi.org/10.2139/ssrn.1616720

Tor-Erik Bakke

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States

Toni M. Whited (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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