PERFORMING AN EVENT STUDY
AN EXERCISE FOR FINANCE STUDENTS
William A. Reese, Jr.
Russell P. Robins
A. B. Freeman School of Business
Tulane University
FEA Conference
Sept. 25, 2015
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WE TEACH OUR STUDENTS:

When there is an announcement of a corporate
acquisition, the price of the firm being acquired
usually goes up.
 The
price of the firm making the acquisition usually
goes down
When an analyst upgrades a stock, it usually
goes up in price
 Initial Public Offerings (IPOs) of common stock
are usually underpriced.

2
WE TEACH OUR STUDENTS:
It is difficult to make money based on some
surprising economic data a day or two after the
data has been released.
 Historically, on average, small-cap stocks do
well in the month of January.
 There are various types of momentum in stock
returns (weekly, monthly, longer)
 Investors tend to put more money into mutual
funds that have recently performed well.

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EVENT STUDIES
 Each
of these facts have been found
by researchers through Event Studies
 Plotting Cumulative Abnormal Returns
(CARs) make Event Studies easy to
explain and understand
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M & A ANNOUNCEMENTS
5
REACTION TO CNBC REPORTS
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NAME CHANGE
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CLASSROOM EVENT STUDIES
We teach the facts
 We show the graphs
 We don’t teach the methodology

 It

can be complex
We don’t have students do their own Event
Studies
 What
to do?
 Time consuming
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OUR EVENT STUDY
 Investments
Course
 Undergrad or MBA
 Easy to Perform
 Easy to Understand
 Predictable Results
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OUR EVENT STUDY
 Are
there abnormal returns when a
stock is added to the S&P 500?
 Is
there abnormal trading volume?
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SHOULD WE EXPECT ANYTHING?
 Since
October 1989, S&P has been
announcing (when possible) changes
to the index one week prior to the
effective date
 Index funds MUST buy the stock
 May create upward price pressure
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OUR DATA
 Every
stock that was added to the
S&P 500 between January 2000 and
July 2015.
Purged
to leave 270 stocks that are still
listed on Yahoo! Finance
Date of addition
Ticker symbol
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OUR SPREADSHEET
 Macro
that obtains data from Yahoo!
Finance for stocks the student selects
and S&P 500
 42 days before the listing date
 10 days after the listing date
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OUR SPREADSHEET
 Event
window is day -10 to day +10
 Returns
for stock and S&P are
calculated for 30 days prior to event
window
“Calculation
Period”
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THE MARKET MODEL
A regression estimates alpha and beta for each
stock during calculation period:
Ri= α + β(RMkt) + e.
 These estimates are used to calculate riskadjusted expected returns during the event
window:
E(R)= α + β(RMkt)

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THE MARKET MODEL

Abnormal returns are calculated:
Abn. Ri = Ri - E(Ri)

Cumulative Abnormal Returns (CARs) are the
sum of all abnormal returns up to time t in the
event window
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THE MARKET MODEL

Cumulative Abnormal (Scaled) Volume is also
calculated for the event window
 Average
volume during calculation period is
established as “normal” volume

CARs and CAVs are averaged across stocks in
the sample and T-stats are calculated.
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TYPICAL RESULTS
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TYPICAL RESULTS
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WHAT THE STUDENTS DO
Select a random set of stocks from our list
 Enter their ticker symbols into spreadsheet
 Click “Download”
 Wait a couple of minutes


Depending on internet speed and number of stocks selected
Observe and analyze the results
 Answer prepared questions
 Come up with their own idea for an event study

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THE STUDENTS WILL LEARN:
How an event study is done
 How to calculate risk-adjusted returns using the
market model
 How to calculate and plot CARs
 Reinforcement of averages, standard errors,
t-stats, and statistical significance
 How buying pressure can affect returns and
volume

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LOCATION OF SPREADSHEET

The Spreadsheet and basic instructions can be
found at
http://info.freeman.tulane.edu/breeseemba/eventstudy.htm
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