BA635 (Fall 2020)

KAIST College of Business

Empirical Studies in Finance (BA635)

Class hours: Monday, Wednesday 17:30 – 19:00

Classroom: SUPEX 104
Instructor: Hyun-Soo Choi
Office: SUPEX 212
Phone: 958-3592
Email: [email protected]

1. Course Description
This course provides an introduction to empirical research in corporate finance, with an
emphasis on the application of cross-sectional and panel data econometric techniques for
causal inference. The objective of this course is threefold: The course is designed to help you
learn these methods via a three-pronged approached.

• First, this course will provide participants with a toolbox and working knowledge of the
empirical methods used in corporate finance. This is an applied course, not a theory
course. Accordingly, I will teach you how to use each tool properly, not how to derive its
asymptotic properties.

• Second, course readings will expose you to examples of the methods being used in
published and working papers. Seeing how the tools are actually used by other
researchers is often far more useful in helping students understand the tools. I will rely
on examples from corporate finance when possible, though I will also reference
examples from other fields in economics including labor, development, and public
finance.

• Third, participants will learn to become sophisticated consumers and eventually

producers of state-of-the-art empirical research in corporate finance that applies cross-
sectional and panel data econometric techniques.

2. Course Structure

The course will be structured as the combination of lectures and student presentations. First, I
will give lectures on the topics on the empirical methods used in corporate finance research.
The slide for the lectures will be available on the course website. The slide connects a variety of
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KAIST College of Business
sources including various textbooks, journal articles, working papers, and other professors’
lecture notes. As such, there is no required “textbook,” but I will make note of the appropriate
references for each lecture. The relevant methodology readings for each lecture are provided at
the bottom of this syllabus, and students are expected to read these prior to the lecture. For
the following class of each lecture, we will have student presentations of three papers related
to the topic from previous lecture. A list of papers to be presented is given below.

3. Course Requirements
Your grade for the course will consist of four components:
• In-class presentation/discussions (30%)
For each week, there will be three papers assigned that students (regardless of whether you are
just auditing) must read and present a discussion of in-class. Students will form groups of their
own choosing, and we will assign each group their paper in the week ahead. E.g. If I give a
lecture on instrumental variable estimations, then at the end of the lecture, I will assign three
papers that make use of IV strategies. Students will present their discussions of these three
papers. Each group will need to make a 15-minute presentation that summarizes and discusses
the paper, and each presentation will be followed by in-class discussion. The purpose of the
assignment is twofold: (1) presentations are one key way people in academia will come to know
(and assess) you. So, it’s a good idea to get some practice now. And (2), this will help you apply
and think critically about the empirical tools discussed in the previous lecture.

Presentation Groups: The class will be organized into three presentation groups, which will
each give a presentation during lectures that include student presentations of related research
papers. You are free to choose your own members. I just recommend that you split yourselves
into three roughly equal-sized groups.

To ensure participation following each presentation, each student must also type up one
concern they had about each of the two papers their group did NOT present and hand these in
at the start of class. I will randomly select 1-2 submissions for each assigned paper and have
that randomly selected student elaborates upon their comment in class. The comments should
be very short [2-3 sentences maximum] and designed to do one of two things: (1) isolate what
you thought the biggest problem of the paper was, or (2) identify a concern you think the
presenting group might overlook. Every failure to turn in this sheet of comments will result in a
reduction in participation points.

• Research proposal (50%)

Basically, you will be asked to sketch out an outline for a possible empirical paper you could
write using tools taught in the course. You’ll need to come up with an interesting question,
place your question in the relevant literature, sketch out an identification strategy for
answering that question, and identify the necessary datasets to implement your identification
strategy. All students will present their research proposal in week 15.
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KAIST College of Business

• Class participation (20%)

You will be graded on participation. Basically, I expect each student to give in-class
presentations during the semester and to turn in weekly comments on each paper their
group was not assigned to present.

Please, just ask. I don’t anticipate that everything I say in class or my lecture notes
will be crystal clear. So, if something is confusing, please just ask me. I can’t guarantee to
always have an immediate answer, especially for questions of a more technical nature, but I
promise to always find one and get back to you.

4. Class Schedule

The tentative class schedule is below. The topics covered and the date in
which they are covered may change, but if this occurs, I will notify you of any changes.
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KAIST College of Business
Tentative Schedule ([L]: Lecture, [P]: Presentation)
Week Monday Wednesday
Week 1 (31 Aug) [L] Linear Regression [Part 1] [L] Linear Regression [Part 2]
Week 2 (7 Sep) [P] Classic #1 (Non-Finance) [L] Linear Regression [Part 3]
Week 3 (14 Sep) [P] Classic #2 (Finance) [L] Causality
Week 4 (21 Sep) [P] Causality [L] Panel Data
Week 5 (28 Sep) [P] Panel Data Public Holiday
Week 6 (5 Oct) [L] Instrumental Variables [Part 1] [L] Instrumental Variables [Part 2]
Week 7 (12 Oct) [P] Instrumental Variables [L] Natural Experiments [Part 1]
Week 8 (19 Oct) Midterm Week
Week 9 (26 Oct) [P] Natural Experiments #1 [L] Natural Experiments [Part 2]
Week 10 (2 Nov) [L] Natural Experiments [Part 3] [P] Natural Experiments #2
Week 11 (9 Nov) [L] Regression Discontinuity [L] Regression Discontinuity
Week 12 (16 Nov) [P] Regression Discontinuity [L] Common Limitations & Errors
Week 13 (23 Nov) [P] Common Limitations & Errors [L] Matching & Selection Models
Week 14 (30 Nov) [L] Matching & Selection Models [P] Matching
Week 15 (7 Dec) [L] Standard Errors & Clustering [P] Miscellaneous
Week 16 (14 Dec) Term paper presentations
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KAIST College of Business
IN-CLASS STUDENT PRESENTATION PAPERS

Below is the list of readings to be presented in class by students. All students are expected to
read these papers, and groups will need to select one paper to present. Groups cannot choose
the same paper to present. I’ve broken down the papers into “Topics”. The “Topic”
corresponds to the schedule of classes and which week the papers will be presented. We will
assign the groups to present each paper in the week prior to the lecture.

Classics #1 (Non-Finance)
1. Angrist, Joshua D., 1990 “Lifetime earnings and the Vietnam era draft lottery: Evidence
from Social Security administrative records,” American Economic Review 80(3), 313-336.
2. Angrist, Joshua D. and Victor Lavy, 1999, “Using Maimonides’ rule to estimate the
effect of class size on scholastic achievement,” Quarterly Journal of Economics, 533-575.
3. Acemoglu, Daron, Simon Johnson, and James A. Robinson, 2001, “The colonial origins
of comparative development: An empirical investigation,” American Economic Review
91(5), 1369-1401.

Classics #2 (Finance)
4. Fazzari, Steven M., R. Glenn Hubbard and Bruce C. Petersen, 1988, “Financing
Constraints and Corporate Investment,” Brookings Papers on Economic Activity, 141–195.
5. Morck, Randal, Andrei Shleifer, and Robert Vishny, 1990, “The Stock Market and
Investment: Is the Market a Sideshow?” Brookings Papers on Economic Activity, 157–215.
6. Opler, Timothy, Larry Pinkowitz, Rene Stulz, and Rohan Williamson, 1999, “The
determinants and implications of corporate cash holdings,” Journal of Financial Economics
52, 3-46.

Causality
7. Rajan, Raghuram G., and Luigi Zingales, 1998, “Financial dependence and growth,”
American Economic Review, 88(3), 559-586.
8. Matsa, David A., 2010 “Capital structure as a strategic variable: Evidence from collective
bargaining,” Journal of Finance, 65(3), 1197-1232.
9. Agarwal, Ashwini, and David A. Matsa, 2013, “Labor unemployment risk and corporate
financing decision,” Journal of Financial Economics, 108(2), pp. 449-470.

Panel Data
10. Khwaja, Asim Ijaz, and Atif Mian, 2008, “Tracing the Impact of Bank Liquidity Shocks:
Evidence from an Emerging Market,” American Economic Review, 98(4), 1413-1442.
11. Paravisini, Daniel, Veronica Rappoport, Philipp Schnabl, and Daniel Wolfenzon, 2014,
“Dissecting the effect of credit supply on trade: Evidence from matched credit-export
data,” Review of Economic Studies, 1-26.
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KAIST College of Business
12. Becker, Bo, Zoran Ivkovic, and Scott Weisbenner, 2011, “Local dividend clienteles,”
Journal of Finance, 66(2), 655-683.

Instrumental Variables
13. Gormley, Todd A., 2010, “The impact of foreign bank entry in emerging markets:
evidence from India,” Journal of Financial Intermediation, 19(1), 26-51.
14. Bennedsen, M., K Nielsen, F. Perez-Gonzalez, and D. Wolfenzon, 2007, Inside the
family firm: The role of families in succession decisions and performance, Quarterly
Journal of Economics, 122, 647-691.
15. Giroud, Xavier, Holger M. Mueller, Alex Stomper, and Arne Westerkamp, 2012, “Snow
and leverage,” Review of Financial Studies, 25, 680-710.

Natural Experiments #1
16. Jayaratne, Jith, and Philip Strahan, 1996, “The finance-growth nexus evidence from bank
branch deregulation,” Quarterly Journal of Economics, 111(3), 639-670.
17. Bertrand, Marianne, and Sendhil Mullainathan, 2003 “Enjoying the quiet life? Corporate
governance and managerial preferences,” Journal of Political Economy, 111(5), 1043-75.
18. Hayes, Rachel M., Michael Lemmon, and Mingming Qiu, 2012, “Stock options and
managerial incentives for risk taking: evidence from FAS 123R,” Journal of Financial
Economics, 105, 174-190.

Natural Experiments #2
19. Gormley, Todd A., and David Matsa, 2011, “Growing Out of Trouble? Corporate
Responses to Liability Risk,” Review of Financial Studies, 24(8), 2781-2821.
20. Becker, Bo, and Per Stromberg, 2012, "Fiduciary Duties and Equity-Debtholder
Conflicts." Review of Financial Studies 25(6), 1931-1969.
21. Agrawal, Ashwini, 2013, “The impact of investor protection law on corporate policy and
performance: evidence from the blue sky laws,” Journal of Financial Economics, 107, 417-35.

Regression Discontinuity
22. Malenko, Nadya, and Yao Shen, 2016, “The role of proxy advisory firms: Evidence from
a regression-discontinuity design,” Review of Financial Studies 29(12), 3394-3427
23. Keys, Benjamin, Ranmoy Mukherjee, Amit Seru, and Vikrant Vig, 2010, Did
securitization lead to lax screening? Evidence from subprime loans, Quarterly Journal of
Economics 125, 307-362.
24. Almeida, Heitor, Vyacheslav Fos, and Mathias Kronlund, 2016, “The Real
Effects of Share Repurchases,” Journal of Financial Economics 119(1), 168-185
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KAIST College of Business
Common Limitations & Errors
25. Gormley, Todd A., and David A. Matsa, 2016, “Playing it Safe? Managerial Preferences,
Risk, and Agency Conflicts,” Journal of Financial Economics 122(3), 431-455
26. Ljungqvist, Alexander, Christopher Malloy, and Felicia Marston, 2009, “Rewriting
history,” Journal of Finance, 64(4), 1935-1960.
27. Bennedsen, Morten, Francisco Perez-Gonzalez, and Daniel Wolfenzon, 2012,
“Evaluating the Impact of the Boss: Evidence from CEO Hospitalization Events”,
working paper, http://www.stanford.edu/~fperezg/valueboss.pdf

Matching
28. Morse, Adair, 2011, “Payday lenders: heroes or villains?” Journal of Financial Economics,
102, 28-44.
29. Colak, Gonul and Toni Whited, 2007, Spin-offs, divestitures, and conglomerate
investment, Review of Financial Studies 20, 557-595.
30. Almeida, Heitor, Igor Cunha, Miguel A. Ferreira, and Felipe Restrepo, 2016, “The Real
Effects of Credit Ratings: The Sovereign Ceiling Channel,” Journal of Finance 72(1), 249-290

Miscellaneous
31. Heider, Florian and Alexander Ljungqvist, 2015, “As certain as debt and taxes:
Estimating the tax sensitivity of leverage from exogenous state tax changes,” Journal of
Financial Economics, 118(3), 684-712
32. Iliev, Peter, 2010, “The effect of SOX Section 404: Costs, earnings quality, and stock
prices, Journal of Finance 65(3), 1163-1196.
33. Appel, Ian R., Todd A. Gormley, and Donald B. Keim, 2016, “Passive Investors, Not Passive
Owners,” Journal of Financial Economics, 121(1), 111-141.
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KAIST College of Business
METHODOLOGY READINGS FOR EACH TOPIC

For each lecture, I’ve listed some readings that will be helpful with understanding the
methodology being discussed. My lectures will be largely based off of these readings, and
students are expected to read these papers prior to the lecture. The lectures primarily draw
from the four below sources, and I’ve provided abbreviations that will be used to refer to each.

1. Wooldridge, Jeffrey M., 2010, Econometric Analysis of Cross-Section and Panel Data, MIT
Press, Massachusetts, Second Edition [Wooldridge]

2. Greene, William H., 2011, Econometric Analysis, Prentice Hall, N.J., Seventh Edition.
[Greene]

3. Angrist, Joshua D., and Jorn-Steffen Pischke, 2009, Mostly Harmless Econometrics,
Princeton University Press, New Jersey. [Angrist-Pischke]

4. Roberts, Michael R., and Toni M. Whited, 2013, “Endogeneity in Empirical Corporate
Finance,” University of Rochester, Handbook of the Economics of Finance, Volume 2, Part A,
493-572 [Roberts-Whited]

Linear Regression
1. Angrist-Pischke, Sections 3.1-3.2, 3.4.1
2. Wooldridge, Sections 4.1-4.2
3. Greene, Chapter 3 & Sections 4.1-4.4, 5.7-5.9, 6.1-6.2

Causality
1. Roberts-Whited, Section 2
2. Angrist-Pischke, Section 3.2
3. Greene, Sections 5.8-5.9
4. Wooldridge, Sections 4.3, 4.4

Panel Data
1. Angrist-Pischke, Sections 5.1, 5.3
2. Greene, Chapter 11
3. Wooldridge, Chapter 10
4. McKinnish, T. 2008. Panel Data Models and Transitory Fluctuations in the Explanatory
Variable In Modeling and Evaluating Treatment Effects in Econometrics, eds. Daniel L. Millimet,
Jeffrey A. Smith, and Edward J. Vytlacil, 335–58. Amsterdam: Elsevier.

Instrumental Variables
1. Roberts-Whited, Section 3
2. Angrist-Pischke, Sections 4.1, 4.4, 4.6
3. Greene, Sections 8.2-8.5
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KAIST College of Business
4. Wooldridge, Chapter 5

Natural Experiments
1. Roberts-Whited, Sections 2.2 and 4
2. Angrist-Pischke, Section 5.2
3. Bertrand, M., E. Duflo, and S. Mullainathan. 2004. How much should we trust
differences-in-differences estimates? Quarterly Journal of Economics 119:249–75.

Regression Discontinuity
1. Roberts-Whited, Section 5
2. Angrist-Pischke, Chapter 6

Common Limitations & Errors

1. Ali, A., S. Klasa, and E. Yeung, 2009, “The limitations of industry concentration
measures constructed with Compustat Data: Implications for finance research,” Review of
Financial Studies, 22(10), 3839-71
2. Gormley, Todd A., and David A. Matsa, 2013, “Common Errors: How to (and Not to)
Control for Unobserved Heterogeneity,” Review of Financial Studies, 27(2), 617-661

Matching
1. Roberts-Whited, Section 6
2. Angrist-Pischke, Sections 3.3.1-3.3.3
3. Wooldridge, Section 21.3.5

Standard Errors, Limited Dependent Variables

1. Angrist-Pischke, Chapter 8 and Sections 3.4.2, 4.6.3
2. Petersen, M. A. 2009. Estimating Standard Errors in Finance Panel Data Sets: Comparing
Approaches. Review of Financial Studies 22:435–80.
3. Bertrand, M., E. Duflo, and S. Mullainathan. 2004. How much should we trust
differences-in-differences estimates? Quarterly Journal of Economics, 119(1): 249-275.
4. Greene, Section 17.3