An Empirical Assessment of Empirical Corporate Finance

111 Pages Posted: 18 Mar 2011 Last revised: 9 Jun 2019

See all articles by Jeffrey L. Coles

Jeffrey L. Coles

University of Utah - Department of Finance

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: June 7, 2019


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 and CEO pay level and worst for takeover defenses and outcomes. Observed manager characteristics have relatively high power to explain CEO contract design and low power for firm focus and investment policy. Including manager and firm fixed effects, along with firm and manager observables, delivers the best fit for dividend payout, the propensity to adopt antitakeover defenses, firm risk, board size, and firm focus. Unobserved manager attributes deliver a high proportion of explained variation in the dependent variable for executive wealth-performance sensitivity, board independence, board size, and sensitivity of expected executive compensation to firm risk, while unobserved firm attributes provide a high proportion of variation explained for dividend payout, antitakeover defenses, book and market leverage, and corporate cash holdings. Including manager and firm fixed effects significantly alters inference on primary explanatory variables in 17 of the 20 representative specifications.

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, Firm focus, R&D, Firm performance

JEL Classification: G3, G30, G31, G32, G34, G35, C23, C58, J31, J33

Suggested Citation

Coles, Jeffrey L. and Li, Zhichuan Frank, An Empirical Assessment of Empirical Corporate Finance (June 7, 2019). Available at SSRN: or

Jeffrey L. Coles (Contact Author)

University of Utah - Department of Finance ( email )

David Eccles School of Business
Salt Lake City, UT 84112
United States
801-587-9093 (Phone)

Zhichuan Frank Li

University of Western Ontario - Ivey School of Business ( email )

1151 Richmond Street North
London Ontario, Ontario N6A 3K7

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