Spurious Inference Caused by Time-Series Variation in Scaling: Real Estate Shocks Did Not Affect Corporate Investment

36 Pages Posted: 4 Jun 2020 Last revised: 16 Nov 2021

See all articles by Ivo Welch

Ivo Welch

University of California, Los Angeles (UCLA); National Bureau of Economic Research (NBER)

Date Written: November 15, 2021

Abstract

Real-estate price shocks did not positively associate with corporate investment from 1992 to 2008, as suggested by Chaney, Sraer, and Thesmar (2012). Instead of changes in the variables of interest (real-estate and investment), their coefficients explain changes in their firm-size scale normalization (property, plant, and equip- ment). Similar panel regression specifications are widespread in empirical corporate economics. My paper proposes a simple alternative specification that can eliminate and thus also diagnose concerns about the role of time-varying denominators. This specification suggests working with ratios of changes, where only the change is normalized, as in (∆ Variable of Interest)/Size Scaling.

Keywords: collateral, real-estate, corporate investment

JEL Classification: D22 G31 R30

Suggested Citation

Welch, Ivo, Spurious Inference Caused by Time-Series Variation in Scaling: Real Estate Shocks Did Not Affect Corporate Investment (November 15, 2021). Available at SSRN: https://ssrn.com/abstract=3599280 or http://dx.doi.org/10.2139/ssrn.3599280

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