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Threshold Events and Identification: A Study of Cash Shortfalls

TOR-ERIK BAKKE and TONI M. WHITED
The Journal of Finance
Vol. 67, No. 3 (JUNE 2012), pp. 1083-1111
Published by: Wiley for the American Finance Association
Stable URL: http://www.jstor.org/stable/23261334
Page Count: 29
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Threshold Events and Identification: A Study of Cash Shortfalls
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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, Investment and financing constraints: Evidence from the funding of corporate pension plans, Journal of Finance 61, 33–71) 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 sharply from the rest of the sample. 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.

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