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Policy Heterogeneity in Empirical Corporate Finance

Murillo Campello

Cornell University; National Bureau of Economic Research (NBER)

Antonio Galvao

University of Iowa

Ted Juhl

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

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Date posted: April 14, 2013 ; Last revised: December 17, 2014

Suggested Citation

Campello, Murillo and Galvao, Antonio 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

Contact Information

Murillo Campello
Cornell University ( 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 F. Galvao (Contact Author)
University of Iowa ( email )
W210 John Pappajohn Bus Bldg
Iowa City, IA 52242-1000
United States
Ted Juhl
University of Kansas - Department of Economics ( email )
Lawrence, KS 66049
United States
785 864-2849 (Phone)
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