Ch. 2: Self-Selection Models in Corporate Finance 39
Abstract
Corporate finance decisions are not made at random, but are usually deliberate deci-
sions by firms or their managers toself-selectinto 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 as-
sumptions 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 corpo-
rate 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
selection, private information, switching regression, treatment effect, matching,
propensity score, Bayesian selection methods, panel data, event study, underwriting,
investment banking, diversification