Shock-Based Causal Inference in Corporate Finance and Accounting Research

We study shock-based methods for credible causal inference in corporate finance research. We focus on corporate governance research, survey 13,461 papers published between 2001 and 2011 in 22 major accounting, economics, finance, law, and management journals; and identify 863 empirical studies in which corporate governance is associated with firm value or other characteristics. We classify the methods used in these studies and assess whether they support a causal link between corporate governance and firm value or another outcome. Only a stall minority of studies have convincing causal inference strategies. The convincing strategies largely rely on external shocks – usually from legal rules – often called “natural experiments”. We examine the 74 shock-based papers and provide a guide to shock-based research design, which stresses the common features across different designs and the value of using combined designs.