ecn 6.docx - Reverse causality change and dynamic models...

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Reverse causality: change and dynamic models First, Liker et al. (1985) and Finkel (1995) suggest that change-on-change models have substantial advantages over cross-sectional data in improving causal inferences. As such, I examine whether changes in facilitation payments (∆ Facilitation Payment ) are associated with changes in discretionary accruals ( ∆|DA| ). Column (1) in Panel A of Table 5 pertains to change-on-change models. The results report a positive and significant relationship between changes in facilitation payments and changes in discretionary accruals, confirming the causal impacts of facilitation payments on earnings management levels. 8 Second, McKinnish (2000) , Hahn et al. (2007) , Jayaraman and Milbourn (2012) , and Burke and Emerick (2016) imply that long-difference change estimators are superior to both the panel and dynamic models in dealing with reverse causality. Consistent with McKinnish (2000) and Jayaraman and Milbourn (2012) , I present change-on-change models over a 3-year interval in column (2) of Panel A, where changes variables are calculated between year t and t -3. The results remain robust to the long-differencing estimation.

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