How Much Should We Trust Staggered Difference-In-Differences Estimates?

70 Pages Posted: 1 Mar 2021 Last revised: 31 Mar 2021

See all articles by Andrew Baker

Andrew Baker

Stanford University, Graduate School of Business

David F. Larcker

Stanford University - Graduate School of Business; European Corporate Governance Institute (ECGI); Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance

Charles C. Y. Wang

Harvard Business School

Date Written: March 29, 2021

Abstract

Difference-in-differences analysis with staggered treatment timing is frequently used to assess the impact of policy changes on corporate outcomes in academic research. However, recent advances in econometric theory show that such designs are likely to be biased in the presence of treatment effect heterogeneity. Given the pronounced use of staggered treatment designs in applied corporate finance and accounting research, this finding potentially impacts a large swath of prior findings in these fields. We survey the nascent literature and document how and when such bias arises from treatment effect heterogeneity. We apply recently proposed methods to a set of prior published results, and find that correcting for the bias induced by the staggered nature of policy adoption frequently impacts the estimated effect from standard difference-in-difference studies. In many cases, the reported effects in prior research become indistinguishable from zero.

Keywords: Difference in differences, staggered difference-in-differences designs, generalized difference-in-differences, dynamic treatment effects

JEL Classification: C13, C18, C21, C22, C23

Suggested Citation

Baker, Andrew and Larcker, David F. and Wang, Charles C. Y., How Much Should We Trust Staggered Difference-In-Differences Estimates? (March 29, 2021). European Corporate Governance Institute – Finance Working Paper No. 736/2021, Rock Center for Corporate Governance at Stanford University Working Paper No. 246, Available at SSRN: https://ssrn.com/abstract=3794018 or http://dx.doi.org/10.2139/ssrn.3794018

Andrew Baker (Contact Author)

Stanford University, Graduate School of Business ( email )

David F. Larcker

Stanford University - Graduate School of Business ( email )

Graduate School of Business
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European Corporate Governance Institute (ECGI) ( email )

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Stanford University - Arthur & Toni Rembe Rock Center for Corporate Governance ( email )

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Charles C. Y. Wang

Harvard Business School ( email )

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