Self-Selection Models in Corporate Finance

Abstract

Corporate finance decisions are not made at random, but are usually deliberate decisions by firms or their managers to self-select into their preferred choices. This chapter reviews econometric models of self-selection. The review is organized into two parts. The first part reviews econometric models of self-selection, focusing on the key assumptions of different models and the types of applications they may be best suited for. Part two reviews empirical applications of selection models in the areas of corporate investment, financing, and financial intermediation. We find that self-selection is a rapidly growing area in corporate finance, partly reflecting its recognition as a pervasive feature of corporate finance decisions, but more importantly, the increasing recognition of selection models as unique tools for understanding, modeling, and testing the role of private information in corporate finance.

Keywords: conditional event studies, endogeneity, Heckman two-step, matching, propensity score, switching regression

JEL Classification: G14, G20, G30