Public Economics Lectures Part 1: Introduction

Cutler 1988
First, compute excess return (ˆɛ is ) for each firm i by regressing:
R it = α + β i
R Mt + ɛ it
Obtain excess return ˆɛ is : return purged of market trends
Here, events are the dates when TRA was voted on in the House and
Senate
Compute the average excess return in a ± 10 day window for each
firm Excess i = ˆɛ is where s is the time of the event
Second step regression:
Excess i = a + b(Inv/K ) i + ν i
where (Inv/K ) i is a measure of the rate of investment of firm i
Theory predicts b < 0
Public Economics Lectures () Part 2: Tax Incidence 111 / 142