Threshold Events and Identification: A Study of Cash Shortfalls
Journal of Finance, Forthcoming
43 Pages Posted: 28 May 2010 Last revised: 28 Nov 2011
Date Written: May 27, 2010
Abstract
Threshold events are discrete events triggered when an observable continuous variable passes a known threshold. We demonstrate how to use threshold events as identification strategies by revisiting the evidence in Rauh (2006) that mandatory pension contributions cause investment declines. Rauh's result stems from heavily underfunded firms that constitute a small fraction of the sample and that differ from the rest of the sample in important ways; that is, the control group differs from the treated group. To alleviate this issue, we use observations near funding thresholds and find causal effects of mandatory contributions on receivables, R&D, and hiring, but not on investment. We also provide useful suggestions and diagnostics for analyzing threshold events.
Keywords: Investment, Regression Discontinuity, Threshold Events
JEL Classification: G31, G32, G35
Suggested Citation: Suggested Citation
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