A Tutorial on the Use of Differences-in-Differences in Management, Finance, and Accounting
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Rafael Felipe Schiozer
Frederico Abou Mourad
Theo Cotrim Martins
Abstract
Context: natural experiments or quasi-experiments have become quite popular in management research. The differences-in-differences (DiD) estimator is possibly the workhorse of these techniques. Objective: the goal of this paper is to provide a tutorial that serves as practical guide for researchers considering using natural experiments to make causal inferences. Methods: we discuss the DiD advantages, concerns, and tests of validity. We also provide an application of the technique, in which we discuss the effect of government guarantees on banks’ degree of risk, using the 2008 financial crisis as a natural experiment. The database used, as well as the Stata and the R scripts containing the analyses, are available as online appendices. Conclusion: DiD may be used to tackle endogeneity concerns when treatment assignment is random.
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Schiozer, R. F., Mourad, F. A., & Martins, T. C. (2020). A Tutorial on the Use of Differences-in-Differences in Management, Finance, and Accounting . Journal of Contemporary Administration, 25(1), e200067. https://doi.org/10.1590/1982-7849rac2021200067
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References
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Gormley, T., & Matsa, D. (2014) Common errors: How to (and not to) control for unobserved heterogeneity. Review of Financial Studies, 27(2), 617-61. https://doi.org/10.1093/rfs/hht047
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Martins, T.C., & Novaes, W. (2012). Mandatory dividend rules: Do they make it harder for firms to invest? Journal of Corporate Finance, 18(4), 953-967. https://doi.org/10.1016/j.jcorpfin.2012.05.002
Meijer, E., Spierdijk, L., & Wansbeek, T. (2017). Consistent estimation of linear panel data models with measurement error. Journal of Econometrics, 200(2), 169-180. https://doi.org/10.1016/j.jeconom.2017.06.003
Mithani, M. A. (2017). Liability of foreignness, natural disasters, and corporate philanthropy. Journal of International Business Studies, 48, 941–963. https://doi.org/10.1057/s41267-017-0104-x
Oliveira, R. F., Schiozer, R., & Barros, L. A. B. C. (2015). Depositors’ perception of “too-big-to-fail”. Review of Finance, 19(1), 191–227. https://doi.org/10.1093/rof/rft057
Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22(1), 435–480. https://doi.org/10.1093/rfs/hhn053
Ponticelli, J., & Alencar, L. S. (2016). Court enforcement, bank loans, and firm investment: Evidence from a bankruptcy reform in Brazil. Quarterly Journal of Economics, 131(3), 1365-1413. https://doi.org/10.1093/qje/qjw015
Roberts, M. R., & Whited, T.M. (2013). Endogeneity in empirical corporate finance. Handbook of the Economics of Finance, 2, 493-572.
Sampaio, J. O., Gallucci Neto, H., Silva, V. A. B., & Schiozer R. (2020). Mandatory ifrs adoption, corporate governance, and firm value. Revista de Administração de Empresas. Retrieved from http://bibliotecadigital.fgv.br/ojs/index.php/rae/article/view/81318/77663
Schiozer, R., Mourad, F. A., & Vilarins, R. S. (2018). Bank risk, bank bailouts and sovereign capacity during a financial crisis: a cross-country analysis. Journal of Credit Risk. 14(4), 1-28. https://doi.org/10.21314/JCR.2018.246
Schiozer, R. F., & Oliveira, R. F. (2016). Asymmetric transmission of a bank liquidity shock. Journal of Financial Stability, 25, 234–246. https://doi.org/10.1016/j.jfs.2015.11.005
Soedarmono, W., Machrouhb, F., & Tarazi, A. (2013). Bank competition, crisis and risk taking: Evidence from emerging markets in Asia. Journal of International Financial Markets, Institutions and Money, 23, 196–221. https://doi.org/10.1016/j.intfin.2012.09.009
Ueda, K., & di Mauro, B. W. (2013). Quantifying structural subsidy values for systemically important financial institutions. Journal of Banking and Finance, 37(10), 3830-3842. https://doi.org/10.1016/j.jbankfin.2013.05.019
Wooldridge, J. M. (2010). Econometric analysis of cross-section and panel data (2nd ed). Massachusetts: MIT Press.
Allen, F. & Carletti, E. (2010). An overview of the crisis: causes, consequences, and solutions. International Review of Finance, 10(1), 1–26. https://doi.org/10.1111/j.1468-2443.2009.01103.x
Almeida, H., Campello, M., Laranjeira, B., & Weisbenner, S. (2011). Corporate debt maturity and the real effects of the 2007 credit crisis. Critical Financial Review, 1, 3-58. http://doi.org/10.3386/w14990
Angrist, J. & Pischke, S. (2008). Mostly harmless econometrics: An empiricists’ companion. Princeton: Princeton University Press.
Arvate, P. R., Galilea, G. W. & Todescat, I. (2018). The queen bee: a myth? The effect of top-level female leadership on subordinate females. Leadership Quarterly, 29(5), 533-548. https://doi.org/10.1016/j.leaqua.2018.03.002
Atanasov, V. & Black, B. (2016). Shock-based causal inference in corporate finance and accounting research. Critical Finance Review, 5(2), 207-304. https://doi.org/10.1561/104.00000036
Bertrand, M., Duflo, E., & Mullainathan, S. (2004). How much should we trust differences - in-differences estimates? Quarterly Journal of Economics, 119(1), 249-275. https://doi.org/10.1162/003355304772839588
Campello, M. Ladika, T., & Matta, R. (2019). Renegotiation frictions and financial distress resolution: Evidence from CDS spreads. Review of Finance, 29(3), 513-556. https://doi.org/10.1093/rof/rfy021
Chen, Y., Hung, M., & Wang, Y. (2018). The effect of mandatory CSR disclosure on firm profitability and social externalities: Evidence from China. Journal of Accounting and Economics, 65(1), 169-190. https://doi.org/10.1016/j.jacceco.2017.11.009.
Dam, L., & Koetter, M. (2012). Bank bailouts and moral hazard: empirical evidence from Germany. Review of Financial Studies, 25(8), 2343-2380. https://doi.org/10.1093/rfs/hhs056
Drechsler, I., Drechsel, T., Marques-Ibanez, D. Schnabl, P. (2016) Who Borrows from the Lender of Last Resort?, Journal of Finance, 71(5), 1933-1974. https://doi.org/10.1111/jofi.12421
Fahlenbrach, R., & Stulz, R. M. (2011). Bank CEO incentives and the credit crisis. Journal of Financial Economics, 99(1), 11-26. http://doi.org/10.1016/j.jfineco.2010.08.010
Flannery, M. J. (1998). Using market information in prudential bank supervision: A review of the US empirical evidence. Journal of Money, Credit and Banking, 30(3), 273–305. https://doi.org/10.2307/2601102
Forssbæck, J., & Shehzad, C. T. (2015). The conditional effects of market power on bank risk – cross-country evidence. Review of Finance, 19(5), 1997–2038. https://doi.org/10.1093/rof/rfu044
Gonçalves, A. B., Schiozer, R. F. & Sheng, H. H. (2018). Trade credit and product market power during a financial crisis. Journal of Corporate Finance, 49, 308-323. https://doi.org/10.1016/j.jcorpfin.2018.01.009
Gormley, T., & Matsa, D. (2014) Common errors: How to (and not to) control for unobserved heterogeneity. Review of Financial Studies, 27(2), 617-61. https://doi.org/10.1093/rfs/hht047
Gormley, T., & Matsa, D. (2011) Growing out of trouble: Corporate responses to liability risk. Review of Financial Studies, 24(8), 2781-2821. https://doi.org/10.1093/rfs/hhr011
Gropp, R., Hakenes, H., & Schnabel, I. (2011). Competition, risk-shifting, and public bail-out policies. Review of Financial Studies, 24(6), 2084–2120. https://doi.org/10.1093/rfs/hhq114
Imbens, G. W. (2015). Matching methods in practice: Three examples. Journal of Human Resources, 50(2), 373-419. https://doi.org/10.3368/jhr.50.2.373
Jayaratne, J., & Strahan, P. E. (1996). The finance-growth nexus: Evidence from Bank Branch Deregulation. Quarterly Journal of Economics, 111(3), 639-670. https://doi.org/10.2307/2946668
Keeley, M. (1990). Deposit Insurance, Risk, and Market Power in Banking. American Economic Review, 80(5), 1183–1200. https://www.jstor.org/stable/2006769
Khwaja, A., & Mian, A. (2008). Tracing the impact of bank liquidity shocks: Evidence from an emerging market. American Economic Review, 98(4), 1413-1442. https://doi.org/10.1257/aer.98.4.1413
Laeven, L., & Valencia, F. (2012). Systemic banking crises database: an update. Working Paper International Monetary Fund, 12/163, 1-32. https://doi.org/10.2139/ssrn.2096234
Martins, T.C., & Novaes, W. (2012). Mandatory dividend rules: Do they make it harder for firms to invest? Journal of Corporate Finance, 18(4), 953-967. https://doi.org/10.1016/j.jcorpfin.2012.05.002
Meijer, E., Spierdijk, L., & Wansbeek, T. (2017). Consistent estimation of linear panel data models with measurement error. Journal of Econometrics, 200(2), 169-180. https://doi.org/10.1016/j.jeconom.2017.06.003
Mithani, M. A. (2017). Liability of foreignness, natural disasters, and corporate philanthropy. Journal of International Business Studies, 48, 941–963. https://doi.org/10.1057/s41267-017-0104-x
Oliveira, R. F., Schiozer, R., & Barros, L. A. B. C. (2015). Depositors’ perception of “too-big-to-fail”. Review of Finance, 19(1), 191–227. https://doi.org/10.1093/rof/rft057
Petersen, M. A. (2009). Estimating standard errors in finance panel data sets: Comparing approaches. Review of Financial Studies, 22(1), 435–480. https://doi.org/10.1093/rfs/hhn053
Ponticelli, J., & Alencar, L. S. (2016). Court enforcement, bank loans, and firm investment: Evidence from a bankruptcy reform in Brazil. Quarterly Journal of Economics, 131(3), 1365-1413. https://doi.org/10.1093/qje/qjw015
Roberts, M. R., & Whited, T.M. (2013). Endogeneity in empirical corporate finance. Handbook of the Economics of Finance, 2, 493-572.
Sampaio, J. O., Gallucci Neto, H., Silva, V. A. B., & Schiozer R. (2020). Mandatory ifrs adoption, corporate governance, and firm value. Revista de Administração de Empresas. Retrieved from http://bibliotecadigital.fgv.br/ojs/index.php/rae/article/view/81318/77663
Schiozer, R., Mourad, F. A., & Vilarins, R. S. (2018). Bank risk, bank bailouts and sovereign capacity during a financial crisis: a cross-country analysis. Journal of Credit Risk. 14(4), 1-28. https://doi.org/10.21314/JCR.2018.246
Schiozer, R. F., & Oliveira, R. F. (2016). Asymmetric transmission of a bank liquidity shock. Journal of Financial Stability, 25, 234–246. https://doi.org/10.1016/j.jfs.2015.11.005
Soedarmono, W., Machrouhb, F., & Tarazi, A. (2013). Bank competition, crisis and risk taking: Evidence from emerging markets in Asia. Journal of International Financial Markets, Institutions and Money, 23, 196–221. https://doi.org/10.1016/j.intfin.2012.09.009
Ueda, K., & di Mauro, B. W. (2013). Quantifying structural subsidy values for systemically important financial institutions. Journal of Banking and Finance, 37(10), 3830-3842. https://doi.org/10.1016/j.jbankfin.2013.05.019
Wooldridge, J. M. (2010). Econometric analysis of cross-section and panel data (2nd ed). Massachusetts: MIT Press.