Critical Finance Review > Vol 13 > Issue 3-4

Are Two-Way Fixed-Effect Difference-In-Differences Estimates Blowing Smoke? A Cautionary Tale from State-Level Bank Branching Deregulation

Anthony Zdrojewski, Rice University, USA, anthony.m.zdrojewski@rice.edu , Alexander W. Butler, Rice University, USA, alex.butler@rice.edu
 
Suggested Citation
Anthony Zdrojewski and Alexander W. Butler (2024), "Are Two-Way Fixed-Effect Difference-In-Differences Estimates Blowing Smoke? A Cautionary Tale from State-Level Bank Branching Deregulation", Critical Finance Review: Vol. 13: No. 3-4, pp 501-529. http://dx.doi.org/10.1561/104.00000147

Publication Date: 12 Aug 2024
© 2024 Anthony Zdrojewski and Alexander W. Butler
 
Subjects
 
Keywords
C13C18C23G21G28O47
BankingDeregulationEconomic growthDifference-in-differencesTwo-way fixed effect estimation
 

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In this article:
1. Introduction 
2. Background 
3. Data 
4. Methods 
5. Results 
6. Conclusions 
Appendix 
References 

Abstract

We illustrate the sensitivity of two-way fixed effects difference-in-differences estimates to innocuous changes in data structure. Using the staggered rollout of state-level bank branching deregulations, three outcome variables are brought to bear on the interventions: personal income growth (a replication), house prices (new to the literature), and per capita cigarette purchases (a falsification test). Estimates are sensitive to panel length, and the data structure creates the false impression of a causal effect of the interventions on all three outcome variables. We contend that any two-way fixed effects regression using this set of interventions is at risk of generating spurious results.

DOI:10.1561/104.00000147