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Research Paper Finance Event Studies

Andries Alin, PhD Alexandru Ioan Cuza University of Iasi Faculty of Economics and Business Administration Postgraduate study in Finance and Risk Management Year 1 (2011-2012) Semester 2

What is an event study?

An event study measures the impact of a specific event on the value of a firm (MacKinlay, 1997); Event studies examine the behavior of firms stock prices around corporate events (Kothari and Warner, 2007).

Overview of Event Studies

Event studies examine the effect of some event or set of events on the value of assets
Loosely speaking, a t-test of the change in price of some asset Unexpectedly large increase or decrease - relative to standard deviation of typical change

Overview of Event Studies (2)

Value of assets
Firms stock prices are the most common Exchange rates Bond prices

Overview of Event Studies (3)

An event study is an attempt to determine whether a particular event in the capital market or in the life of a company has affected a companys stock market performance. The event-study methodology aims to separate companyspecific events from market- and industry specific events, and has often been used as evidence for or against market efficiency. An event study aims to determine whether an event or announcement caused an abnormal movement in a companys stock price.

Examples of events or set of events

mergers and acquisitions announcements, takeovers, earnings announcements, stock splits, issues of new debt or equity, resignation of CEO or deaths of corporate executives, product recalls

Examples of events or set of events

announcements of macroeconomic variables (inflation rate, GDP growth, trade deficit etc.), natural disaster (earthquake, flood or fire) regulatory change, change in state of corporation etc.

Impact of an event on
global financial markets, national financial markets, equity or debt markets, one sector, one company.

Impact of an event on
value of assets, return variance, trading volume, operating performance, total revenue etc.


Stages of an event study

1. defining the event and the event window; 2. measuring the stocks performance during the announcement period; 3. estimating the expected performance of the stock during this announcement period in the absence of the announcement; 4. computing the abnormal return and measuring its statistical and economic significance.


First stage
Defining the event under investigation; Determining the selection criteria for the inclusion of a given firm(s) in the study; Identify the period over which the security prices of the firms involved in this event will be examined (prior and post- event)

Type of event
Are we able able to anticipate the event?

Are we able to anticipate the event?



Second stage
measuring the stocks performance for window period;

Ri, t+ n =

pi, t+ n pi, t p i, t

Ri, t+ n = ln(

p i, t+ n p i, t


Third stage
Measuring the expected return, the return that would have accrued to the shareholders in the absence of this or any other unusual event Selecting and applying the model of expected returns


Expected return models 1

The constant expected returns model:

Rit = i + it
where, Rit is the return for stock i over time period t, i is the expected return for stock i, and eit is the usual statistical error term.


Expected return models 2

The market model:

Ri, t = i + i Rm, t + i, t
where, ai and bi are firm-specific parameters, and Rmt is the market return for the period t.


Expected return models 3

Capital Asset Pricing Model (CAPM):

Ri, t = Rf + i ( Rm, t Rf ) + i, t
where, Rf is the risk free rate and i is the beta or systematic risk of stock i.


Expected return models 4

Arbitrage Pricing Theory:

Ri, t = 0 + i1F1t + i 2 F2t + ... + in Fnt + i, t

where, F1, F2,..., Fn are the returns on the n factors that generate returns, and are the factor loadings.


Fourth stage
The unexpected announcement period return, also known as the abnormal return, is computed as the actual return minus the estimated expected return.

ARi, t = Rit E( Rit X t )

where ARit, Rit, and E(Rit|X) are the abnormal, observed, and predicted returns respectively for time period t.

This abnormal return is the estimated impact of the event on the share value.


Measuring statistical and economic significance of abnormal return

Designing of the testing framework for the abnormal returns; Defining the null hypothesis and and determining the techniques for aggregating the individual firm abnormal returns

Type of event
Single event

Multiple events

Cumulative average abnormal returns (CAR) could be calculated over following different time intervals [ -1,+1], [ -2,+2], [ -5,+5], [ -10,+10] ..

Following Brown and Warner (1985) we can calculate the statistical significance as follows:



Stephen Brown, and Jerold Warner, 1980, Measuring Security Price Performance, Journal of Financial Economics, 8, 205-258. Corrado, Charles, 1989, A nonparametric test for abnormal security-price performance in event studies, Journal of Financial Economics, Vol. 23, No. 2, pp. 385-395. Craig MacKinlay, 1997, Event Studies in Economics and Finance, Journal of Economic Literature, 35, 13-39. Charles Corrado, 2011, Event studies: A methodology review. Accounting & Finance, 51: 207234. S.P. Khotari, and Jerold Warner, 2006, Econometrics of Event Studies, in Espen Eckbo (ed.), Handbook of Corporate Finance: Empirical Corporate Finance, Volume A (Handbooks in Finance Series, Elsevier/North-Holland) Benninga, Simon, 2008, Financial modeling, 3rd ed., The MIT Press


One page with one (or more) potential research ideas based on the event study methodology.