Signaling, Random Assignment, and Causal Effect Estimation

Causal evidence from random assignment has been labeled "the most credible." We argue itis generally incomplete in finance/economics, omitting central parts of the true empirical causalchain. Random assignment, in eliminating self-selection, simultaneously precludes signaling viatreatment choice. However, outside experiments, agents enjoy discretion to signal, thereby caus-ing changes in beliefs and outcomes. Therefore, if the goal is informing discretionary decisions,rather than predicting outcomes after forced/mistaken actions, randomization is problematic.As shown, signaling can amplify, attenuate, or reverse signs of causal e¤ects. Thus, traditionalmethods of empirical finance, e.g. event studies, are often more credible/useful