Testing Parallel Trends in Differences-in-Differences and Event Study Designs: A Research Approach Based on Pre-Treatment Period Significance

Abstract

Traditional tests for parallel trends in the context of differences-in-differences are based on the observation of the mean values of the dependent variable in the treatment and control groups over time. However, given the new discussions brought by the development of the event study designs, controlling for observable factors may intervene in the fulfilment of the parallel trend assumption. This article presents a simple test based on the statistical significance of pre-treatment periods which can be extended from the classic Differences-in-Differences up to event study designs in universal absorbing treatments. The test requires at least two pre-treatment periods and can done by constructing appropriate dummy variables.