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Policy Heterogeneity in Empirical Corporate Finance

56 Pages Posted: 14 Apr 2013 Last revised: 17 Dec 2014

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management; National Bureau of Economic Research (NBER)

Antonio F. Galvao

University of Arizona

Ted Juhl

University of Kansas - Department of Economics

Date Written: November 15, 2013

Abstract

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.

Keywords: fixed effects, estimation, slope heterogeneity

JEL Classification: G31, C23

Suggested Citation

Campello, Murillo and Galvao, Antonio F. and Juhl, Ted, Policy Heterogeneity in Empirical Corporate Finance (November 15, 2013). Available at SSRN: https://ssrn.com/abstract=2250772 or http://dx.doi.org/10.2139/ssrn.2250772

Murillo Campello

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

114 East Avenue
369 Sage Hall
Ithaca, NY 14853
United States

HOME PAGE: http://www.johnson.cornell.edu/Faculty-And-Research/Profile.aspx?id=mnc35

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138

Antonio Galvao (Contact Author)

University of Arizona ( email )

McClelland Hall, Room 401 1130 E. Helen Street
Tucson, AZ 85721
United States

Ted Juhl

University of Kansas - Department of Economics ( email )

Lawrence, KS 66049
United States
785 864-2849 (Phone)

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