Events Studies

8/12/2019 Events Studies

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Event Study Methodology

An event study is an empirical investigation of the

relationship between share prices and firm-specific

events.

Possible Events:

Announcement of a company dividend

Announcement of company earnings

News of a takeover

News of an issue of shares

Announcement of a change in company top

management

Does the news of these events cause share prices

to change in a systematic manner?


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Useful information unlike irrelevant information

is likely to cause investors to revise their beliefs

about the worth of a company!s share.

"onse#uently a researcher can identify useful

information by undertaking studies to discover

whether or not the publication of information is

followed by a stock market price reaction$

"arsberg and Day %&'()*


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To Test For Information Content

Null Hypothesis

Actual return %given information* + the e,pected

return without the information is e#ual to ero

/ + 0 % / * 1 2

lternative Hypothesis

Actual return %given information* + the e,pected

return without the information is not e#ual to ero.

/ + 0 % / * 3 2


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Standard Form of an Event Study

&. 0vent definition and selection criteria.

- Define the event of interest.

- Determine the selection criteria for the

inclusion of a given firm in the study.

4. 5dentify event dates for the sample of firms

sub/ect to the disclosure item of interest and

group observations into a common event time.

6.7elect a model for calculating abnormal

returns8

A/t 1 /t - 0 % /t*

).0stimate the model parameters using a subset of

data %known as the estimation !indo!*.

9ithin the overall test periodof interest around

each event date calculate abnormal returns for

each firm and for each period.


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:."ompute the mean abnormal return across firms

in the sample possibly cumulated over the test

period.

;. standard deviation


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Event Time

=ove from calendar time to event time!.

@or e,ample8

A lc announce new capital investment of B42m

on Canuary 4&st422.

D informs the market of new investment of B&:mfor product development on =ay 4nd 422.

E lc state that they are setting up a new plant in

Dundee on Culy 42th422.

F lc publish investment plans for new e#uipmenton Gctober 4nd422.

C @ = A = C C A 7 G N D

A H

D H

E H

F H


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Estimation nnoun"ement Test

Period #ay Period

#ay t$%&' ( #ay t$% #ay t #t)% ( #t)%'

Pl"

&(2 days before 4&>&>2 &2 days after 4&>&>24&>&>2

#

&(2 days before 4>:>2 &2 days after 4>:>2

4>:>2

* Pl"

&(2 days before 42>>2 &2 days after 42>>2

42>>2

+ Pl"

&(2 days before 4>&2>2 4>&2>2 &2 days after 4>&2>2


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lternative bnormal ,eturn Metri"s

A/t 1 /t - 0 % /t*

Cal"ulating ,eturns

Discrete

/t 1 %/t I D/t J /t-&* > /t-&

Kogarithmic

/t 1 ln L%/t I D/t* > /t-&*M

Arguments8 theoretical empirical

Measurement Interval

=onthly

9eekly

Daily

Arguments8 analytical empirical


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-en"hmar. for bnormal ,eturns

&. =ean Ad/usted eturns

0 % /* 1 k/ for all t

A/t 1 /t - k/

4. =arket Ad/usted eturns

0 % /* 1 0 % m * for all /

A/t 1 /t - mt

6. "A= enchmark

0 % /t* 1 % & + O/* ft I O/0 % mt*

A/t 1 /t - L % & + O/* ft I O/mtM


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). =arket =odel enchmark

/t 1 P/ I O/mt I A/t

A/t 1 /t - %P/I O/mt*


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Choi"e of Estimation and Test Periods

0stimating the market model8

Daily data ;2 - ;22 observations

9eekly data 4 + ) years

=onthly data : years

Choi"e of Mar.et Inde/

ublished value-weighted or e#ually-weightedarithmetic average inde, of e#uity securities.


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-road Con"lusions

Gn randomly generated samples estimating the

market model by GK7 regression and employing

standard parametric statistical tests is a well-

specified procedure under a variety of conditions.

- Daily data results in more powerful tests than

monthly data.

- eing able to specify event dates accurately

greatly increases the power of the tests.

- An e#ually-weighted inde, leads to more

powerful tests than a value-weighted inde,.


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Cumulating bnormal ,eturns

"umulative Abnormal eturns8

"A 1 Q &>N Q A /t

Abnormal erformance 5nde,8

R A5 1 &>N Q % & I A /t* - &


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0ther 1imitations

"onfounding events

Snowledge of when the reaction to the event is

supposed to have occurred

ecognition that these are /oint hypotheses with

the model of e,pected returns being used.

7hould you e,pect a price change?


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Some 2seful ,eferen"es

Armitage 7. %&'':*8 0vent 7tudy =ethods and

0vidence on

Documents

Events Studies