A Tutorial on the Use of Differences-in-Differences in Management, Finance, and Accounting

Abstract

ABSTRACT Context: natural experiments or quasi-experiments have become quite popular in management research. The differences-in-differences (DiD) estimator is possibly the workhorse of these techniques. Objective: the goal of this paper is to provide a tutorial that serves as practical guide for researchers considering using natural experiments to make causal inferences. Methods: we discuss the DiD advantages, concerns, and tests of validity. We also provide an application of the technique, in which we discuss the effect of government guarantees on banks’ degree of risk, using the 2008 financial crisis as a natural experiment. The database used, as well as the Stata and the R scripts containing the analyses, are available as online appendices. Conclusion: DiD may be used to tackle endogeneity concerns when treatment assignment is random.