Signaling, Instrumentation, and CFO Decision-Making

42 Pages Posted: 10 Mar 2020 Last revised: 3 Jun 2021

See all articles by Christopher Hennessy

Christopher Hennessy

London Business School

Gilles Chemla

Imperial College Business School; CNRS ; Centre for Economic Policy Research (CEPR)

Date Written: April 22, 2021


Building parable economies embedding econometricians, we view alternative estimators (IV, fuzzy RD, natural experiments, OLS, event studies) from the perspective of privately-informed decision-makers, e.g. CFOs. IV estimates can be misleading since randomization through observable instruments eliminates signal content arising from discretion. If the goal is informing discretionary decisions, rather than predicting outcomes after forced/mistaken actions, instrumentation is problematic, whereas OLS or event studies can be sufficient. The analysis shows the utility of alternative estimators hinges upon oft-neglected assumptions about agent/econometrician information sets, as distinct from exclusion restrictions. We recommend parable economy estimation as precursor to real-world IV estimation.

Keywords: signal, selection, IV, fuzzy RDD, experiments, corporate finance, CFO, government policy

JEL Classification: D82, G14, G18, G28, G3, E6, J24

Suggested Citation

Hennessy, Christopher and Chemla, Gilles, Signaling, Instrumentation, and CFO Decision-Making (April 22, 2021). Available at SSRN: or

Christopher Hennessy

London Business School

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Gilles Chemla (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom
+44 207 594 9161 (Phone)
+44 207 594 9210 (Fax)

CNRS ( email )

Dauphine Recherches en Management
Place du Marechal de Lattre de Tassigny
Paris, 75016
331 44054970 (Phone)

Centre for Economic Policy Research (CEPR)

United Kingdom

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