Balancing External vs. Internal Validity: An Application of Causal Forest in Finance

References

• Aghion P, Bolton P (1992) An incomplete contracts approach to financial contracting. Rev. Econom. Stud. 59(3):473–494.Crossref, Google Scholar
• Akins B, Bitting J, DeAngelis D, Gaulin M (2025) CEO short-term incentives and the agency cost of debt. Contemporary Accounting Res. 42(2):1388–1422.Crossref, Google Scholar
• Athey S, Wager S (2019) Estimating treatment effects with causal forests: An application. Observational Stud. 5(2):37–51.Crossref, Google Scholar
• Athey S, Tibshirani J, Wager S (2019) Generalized random forests. Ann. Statist. 47(2):1148–1178.Crossref, Google Scholar
• Bakke T-E, Jens CE, Whited TM (2012) The real effects of delisting: Evidence from a regression discontinuity design. Finance Res. Lett. 9(4):183–193.Crossref, Google Scholar
• Balsam S, Gu Y, Mao CX (2018) Credit influence and CEO compensation: Evidence from debt covenant violations. Accounting Rev. 93(5):23–50.Crossref, Google Scholar
• Barber BM, Lyon JD (1996) Detecting abnormal operating performance: The empirical power and specification of test statistics. J. Financial Econom. 41(3):359–399.Crossref, Google Scholar
• Barber BM, Lyon JD (1997) Detecting long-run abnormal stock returns: The empirical power and specification of test statistics. J. Financial Econom. 43(3):341–372.Crossref, Google Scholar
• Bartov E (1993) The timing of asset sales and earnings manipulation. Accounting Rev. 68(4):840–855.Crossref, Google Scholar
• Becher DA, Griffin TP, Nini G (2022) Creditor control of corporate acquisitions. Rev. Financial Stud. 35(4):1897–1932.Crossref, Google Scholar
• Beneish MD, Press E (1993) Costs of technical violation of accounting-based debt covenants. Accounting Rev. 68(2):233–257.Crossref, Google Scholar
• Beneish MD, Press E (1995) The resolution of technical default. Accounting Rev. 70(2):337–353.Crossref, Google Scholar
• Bhaskar LS, Krishnan GV, Yu W (2016) Debt covenant violations, firm financial distress, and auditor actions. Contemporary Accounting Res. 34(1):186–215.Crossref, Google Scholar
• Billett MT, Esmer B, Yu M (2018) Creditor control and product-market competition. J. Banking Finance 86:87–100.Crossref, Google Scholar
• Bird A, Ertan A, Karolyi SA, Ruchti TG (2022a) Lender forbearance. J. Financial Quant. Anal. 57(1):207–239.Crossref, Google Scholar
• Bird A, Ertan A, Karolyi SA, Ruchti TG (2022b) Short-termism spillovers from the financial industry. Rev. Financial Stud. 35(7):3467–3524.Crossref, Google Scholar
• Bird A, Hertzel M, Karolyi SA, Ruchti TG (2022c) The value of lending relationships. Preprint, submitted September 7, https://doi.org/10.2139/ssrn.4197403.Google Scholar
• Black F (1976) The dividend puzzle. J. Portfolio Management 2(2):5–8.Crossref, Google Scholar
• Bulan L, Hull T (2013) The impact of technical defaults on dividend policy. J. Banking Finance 37(3):814–823.Crossref, Google Scholar
• Calonico S, Cattaneo MD, Farrell MH (2020) Optimal bandwidth choice for robust bias-corrected inference in regression discontinuity designs. Econometrics J. 23(2):192–210.Crossref, Google Scholar
• Calonico S, Cattaneo MD, Farrell MH, Titiunik R (2021) rdrobust: Robust data-driven statistical inference in regression-discontinuity designs. R package version 2.2. Accessed October 2024, https://rdrr.io/cran/rdrobust/.Google Scholar
• Chakraborty I, Chava S, Ganduri R (2022) Credit default swaps and lender incentives in bank debt renegotiations. J. Financial Quant. Anal. 58(5):1911–1942.Crossref, Google Scholar
• Chatterjee C, Hass LH, Hribar P, Kalogirou F (2021) Debt covenant violations and employee safety. Preprint, submitted May 14, https://doi.org/10.2139/ssrn.3844771.Google Scholar
• Chava S, Roberts MR (2008) How does financing impact investment? The role of debt covenants. J. Finance 63(5):2085–2121.Crossref, Google Scholar
• Chava S, Nanda V, Xiao SC (2017) Lending to innovative firms. Rev. Corporate Finance Stud. 6(2):234–289.Crossref, Google Scholar
• Chava S, Wang R, Zou H (2019) Covenants, creditors’ simultaneous equity holdings, and firm investment policies. J. Financial Quant. Anal. 54(2):481–512.Crossref, Google Scholar
• Chen KCW, Wei KCJ (1993) Creditors’ decisions to waive violations of accounting-based debt covenants. Accounting Rev. 68(2):218–232.Crossref, Google Scholar
• Chen C, Kim J, Zhu C (2017) The impact of debt covenant violation on credit default swap spreads. Preprint, submitted January 6, https://doi.org/10.2139/ssrn.2893672. Google Scholar
• Chernenko S, Erel I, Prilmeier R (2022) Why do firms borrow directly from nonbanks? Rev. Financial Stud. 35(11):4902–4947.Crossref, Google Scholar
• Chodorow-Reich G, Falato A (2022) The loan covenant channel: How bank health transmits to the real economy. J. Finance 77(1):85–128.Crossref, Google Scholar
• Christensen TE, Pei H, Pierce SR, Tan L (2019) Non-GAAP reporting following debt covenant violations. Rev. Accounting Stud. 24:629–664.Crossref, Google Scholar
• Colonnello S, Koetter M, Stieglitz M (2020) Benign neglect of covenant violations: Blissful banking or ignorant monitoring? Econom. Inquiry 59(1):459–477.Crossref, Google Scholar
• Cook K, Ma T, Zhao YE (2020) Do creditors influence corporate tax planning? Evidence from loan covenants. Hasseldine J, ed. Advances in Taxation, vol. 27 (Emerald Publishing Limited, Leeds, UK), 1–42. Crossref, Google Scholar
• Daher MM, Ismail AK (2018) Debt covenants and corporate acquisitions. J. Corporate Finance 53:174–201.Crossref, Google Scholar
• Davis JMV, Heller SB (2017) Using causal forests to predict heterogeneity: An application to summer jobs. Amer. Econom. Rev. 107(5):546–550.Crossref, Google Scholar
• DeFond ML, Jiambalvo J (1994) Debt covenant violations and manipulation of accruals. J. Accounting Econom. 17(1–2):145–176.Crossref, Google Scholar
• Demerjian PR, Owens EL (2016) Measuring the probability of financial covenant violation in private debt contracts. J. Accounting Econom. 61(2–3):433–447.Crossref, Google Scholar
• Demiroglu C, James CM (2010) The information content of bank loan covenants. Rev. Financial Stud. 23(10):3700–3737.Crossref, Google Scholar
• Dichev ID, Skinner DJ (2002) Large-sample evidence on the debt covenant hypothesis. J. Accounting Res. 40(4):1091–1123.Crossref, Google Scholar
• Dimmery D (2016) rdd: Regression discontinuity estimation. R package version 0.57. Accessed October 2024, https://rdrr.io/cran/rdd/.Google Scholar
• Easley D, de Prado ML, O’Hara M, Zhang Z (2021) Microstructure in the machine age. Rev. Financial Stud. 34(7):3316–3363.Crossref, Google Scholar
• Erel I, Stern LH, Tan C, Weisbach MS (2021) Selecting directors using machine learning. Rev. Financial Stud. 34(7):3226–3264.Crossref, Google Scholar
• Ersahin N, Irani RM, Le H (2021) Creditor control rights and resource allocation within firms. J. Financial Econom. 139(1):186–208.Crossref, Google Scholar
• Ertan A, Karolyi SA (2016) Debt covenants and the expected cost of technical default. Preprint, submitted June 15, https://doi.org/10.2139/ssrn.2795226.Google Scholar
• Falato A, Liang N (2016) Do credit rights increase employment risk? Evidence from loan covenants. J. Finance 71(6):2545–2590.Crossref, Google Scholar
• Ferreira D, Ferreira MA, Mariano B (2018) Creditor control rights and board independence. J. Finance 73(5):2385–2423.Crossref, Google Scholar
• Francis B, Shen YV, Wu Q (2023) Do creditor control rights impact corporate tax aggressiveness? Evidence from debt covenant violations. Working paper, Lally School of Management, Rensselaer Polytechnic Institute, Troy, NY.Google Scholar
• Franz DR, HassabElnaby HR, Lobo GJ (2014) Impact of proximity to debt covenant violation on earning management. Rev. Accounting Stud. 19:473–505.Crossref, Google Scholar
• Freudenberg F, Imbierowicz B, Saunders A, Steffen S (2017) Covenant violations and dynamic loan contracting. J. Corporate Finance 45:540–565.Crossref, Google Scholar
• Gao J, Karolyi SA, Pacelli J (2018) Screening and monitoring by inattentive corporate loan officers. Working paper, DePaul University Driehaus College of Business, Chicago.Google Scholar
• Gao Y, Khan M, Tan L (2017) Further evidence on the consequences of debt covenant violations. Contemporary Accounting Res. 34(3):1489–1521.Crossref, Google Scholar
• Gopalakrishnan V, Parkash M (1995) Borrower and lender perceptions of accounting information in corporate lending agreements. Accounting Horizons 9(1):13–26.Google Scholar
• Graham JR, Harvey CR, Rajgopal S (2005) The economic implications of corporate financial reporting. J. Accounting Econom. 40(1–3):3–73.Crossref, Google Scholar
• Griffin TP, Nini G, Smith DC (2018) Losing control? The 20-year decline in loan covenant restrictions. Preprint, submitted November 27, https://doi.org/10.2139/ssrn.3277570.Google Scholar
• Gu Y, Mao CX, Tian X (2017) Banks’ interventions and firms’ innovation: Evidence from debt covenant violations. J. Law Econom. 60(4):637–671.Crossref, Google Scholar
• Haw I-M, Jung K, Lilien SB (1991) Overfunded defined benefit pension plan settlements without asset reversions. J. Accounting Econom. 14(3):295–320.Crossref, Google Scholar
• He L, Zhang J, Zhong L (2021) The real effects of financing on corporate social responsibility: Evidence from covenant violations. Preprint, submitted January 9, https://doi.org/10.2139/ssrn.3727652.Google Scholar
• Hünermund P, Louw B, Caspi I (2023) Double machine learning and automated confounder selection: A cautionary tale. J. Causal Inference 11(1):20220078.Crossref, Google Scholar
• Iacus SM, King G, Porro G (2011) Causal inference without balance checking: Coarsened exact matching. Political Anal. 20(1):1–24.Crossref, Google Scholar
• Imbens G, Kalyanaraman K (2012) Optimal bandwidth choice for the regression discontinuity estimator. Rev. Econom. Stud. 79(3):933–959.Crossref, Google Scholar
• Jens CE, Page TB, Reeder JC III (2021) Controlling for group-level heterogeneity in causal forest. Preprint, submitted August 20, https://doi.org/10.2139/ssrn.3907601.Google Scholar
• Jensen MC, Meckling WH (1976) Theory of the firm: Managerial behavior, agency costs and ownership structure. J. Financial Econom. 3(4):305–360.Crossref, Google Scholar
• Jha A (2013) Earnings management around debt-covenant violations—An empirical investigation using a large sample of quarterly data. J. Accounting Auditing Finance 28(4):369–396.Crossref, Google Scholar
• Jiang L, Zhou H (2017) The role of audit verification in debt contracting: Evidence from covenant violations. Rev. Accounting Stud. 22:469–501.Crossref, Google Scholar
• Keil J (2023) The value of lending relationships when creditors are in control. J. Corporate Finance 79:102363.Crossref, Google Scholar
• Knittel CR, Stolper S (2025) Using machine learning to target treatment: The case of household energy use. Econom. J. Forthcoming.Google Scholar
• Li F, Morgan KL, Zaslavsky AM (2018) Balancing covariates via propensity score weighting. J. Amer. Statist. Assoc. 113(521):390–400.Crossref, Google Scholar
• Lin Y, Xin X, Zhang L, Zhang Z (2017) Bank monitoring and corporate tax planning: Evidence from loan covenants. Working paper, Asian Bureau of Finance and Economic Research, Singapore.Google Scholar
• McCaffrey DF, Griffin BA, Almirall D, Slaughter ME, Ramchand R, Burgette LF (2013) A tutorial on propensity score estimation for multiple treatments using generalized boosted models. Statist. Medicine 32(19):3388–3414.Crossref, Google Scholar
• McCrary J (2008) Manipulation of the running variable in the regression discontinuity design: A density test. J. Econometrics 142(2):698–714.Crossref, Google Scholar
• Myers SC (1977) Determinants of corporate borrowing. J. Financial Econom. 5(2):147–175.Crossref, Google Scholar
• Nini G, Smith DC, Sufi A (2009) Creditor control rights and firm investment policy. J. Financial Econom. 92(3):400–420.Crossref, Google Scholar
• Nini G, Smith DC, Sufi A (2012) Creditor control rights, corporate governance, and firm value. Rev. Financial Stud. 25(6):1713–1761.Crossref, Google Scholar
• Nordlund J (2018) Spillovers from creditor control. Unpublished working paper, Louisiana State University, Baton Rouge, LA.Google Scholar
• O’Neill E, Weeks M (2018) Causal forest estimation of heterogeneous household response to time-of-use electricity pricing schemes. Preprint, submitted October 22, https://arxiv.org/abs/1810.09179. Google Scholar
• Oster E (2016) Unobservable selection and coefficient stability: Theory and evidence. J. Bus. Econom. Statist. 37(2):187–294.Crossref, Google Scholar
• Roberts MR, Sufi A (2009) Control rights and capital structure: An empirical investigation. J. Finance 64(4):1657–1695.Crossref, Google Scholar
• Roberts MR, Whited TM (2012) Endogeneity in empirical corporate finance. Constantinides GM, Harris M, Stulz R, eds. Handbook of the Economics of Finance, vol. 2 (Elsevier, Amsterdam), 493–572.Google Scholar
• Robins JM, Rotnitzky A, Zhao LP (1994) Estimation of regression coefficients when some regressors are not always observed. J. Amer. Statist. Assoc. 89(427):846–866.Crossref, Google Scholar
• Robinson PM (1988) Root-N-consistent semiparametric regression. Econometrica 56(4):931–954.Crossref, Google Scholar
• Rosenbaum PR (2002) Observational Studies, 2nd ed. (Springer, New York).Crossref, Google Scholar
• Smith CW, Warner JB (1979) On financial contracting: An analysis of bond covenants. J. Financial Econom. 7(2):117–161.Crossref, Google Scholar
• Sweeney AP (1994) Debt-covenant violations and managers’ accounting responses. J. Accounting Econom. 17(3):281–308.Crossref, Google Scholar
• Tan L (2013) Creditor control rights, state of nature verification, and financial reporting conservatism. J. Accounting Econom. 55(1):1–22.Crossref, Google Scholar
• Tibshirani J, Athey S, Friedberg R, Hadad V, Hirshberg D, Miner L, Sverdrup E, Wager S, Wright M (2020) grf: Generalized random forests. R package version 2.3.1. Accessed October 2024, https://www.rdocumentation.org/packages/grf/versions/2.3.1.Google Scholar
• Vashishtha R (2014) The role of bank monitoring in borrowers’ discretionary disclosure: Evidence from covenant violations. J. Accounting Econom. 57(2–3):176–195.Crossref, Google Scholar
• Wager S, Athey S (2018) Estimation and inference of heterogeneous treatment effects using random forests. J. Amer. Statist. Assoc. 113(523):1228–1242.Crossref, Google Scholar
• Watts RL, Zimmerman JL (1986) Positive Accounting Theory (Prentice-Hall, Englewood Cliffs, NJ).Google Scholar
• Zhang Z (2019) Bank interventions and trade credit: Evidence from debt covenant violations. J. Financial Quant. Anal. 54(5):2179–2207.Crossref, Google Scholar