Forthcoming Paper

“Can Central Banks Boost Corporate Investment? Evidence from ECB Liquidity Injections” by Stine Louise von Rüden, Marti G. Subrahmanyam, Dragon Yongjun Tang, and Sarah Qian Wang

Paper Spotlight: Economic Significance in Corporate Finance

Todd Mitton

A recent trend in the reporting of empirical results in the finance literature has been to focus on the economic significance of the results, rather than simply stating the statistical significance of the documented effects. This is a welcome development that will help convey the importance of the empirical findings in our field. But what is the best way to measure economic significance? Should the effects be reported as a percentage of the mean of the outcome variable studied, or as a percentage of the standard deviation of this variable, or should we use some other scaling method? And what other information needs to be provided in empirical papers so the readers can fully assess the economic impact of the reported findings?

All of these questions are addressed in the forthcoming RCFS article “Economic Significance in Corporate Finance,” authored by Todd Mitton. The goal of the paper is to provide simple guidelines toward improving the way in which economic significance is reported and discussed in the literature. The analysis in the paper shows that we need to provide measures of economic significance scaled by the standard deviation (not the mean) of the outcome variable. Moreover, the author argues that papers need to provide sufficient information to allow readers to judge economic significance, including providing benchmarks for putting economic significance in context. These recommendations are based on analysis of work done in the context of some of the most studied variables in empirical corporate finance (e.g., firm profitability, or firm investment), but they apply in other contexts as well, as at least some of the desirable properties of measures scaled by the standard deviation hold for all dependent variables, and providing sufficient information and using benchmarks is a common-sense recommendation for all dependent variables. In sum, by following the recommendations in this paper and by giving greater attention to evaluating the economic significance of empirical results, we can increase our understanding of the importance of findings in corporate finance research.

Spotlight by Camelia Kuhnen
Photo courtesy of Todd Mitton