FIN 938 Investments Seminar
CP3 – Panel Regression Analysis: Daily Abnormal Stock Returns on the Dividend Pay Date
Analyze the data provided in the following library on my CRMDA account:
libname CP3
'R:\users\pkoch\PK_Space\FIN 938_computer problems\CP3_FM_Panel w clus_Panel w FE_DRIPs';
The dataset, all1_qtr_9612_abridged_before_08, contains quarterly observations of the following
firm-specific variables, for the panel of all U.S. dividend-paying stocks, for 1996 - 2012:
Permno, ticker, date, a, DRIP, quarter, DRIP,
bm_ar0, yld, Lpct_inst, lnsize, spread, and log_hilo (among others).
This dataset contains quarterly data on certain firm characteristics, and the daily benchmarkadjusted abnormal return on the quarterly dividend pay date (bm_ar0 = AR(0)), for all NYSE,
AMEX, and NASDAQ common stocks from CRSP during the period, January 1996 through
December 2012. These abnormal returns (AR(0)) are computed by subtracting a daily
benchmark return for every firm, based on the firm’s size and book-to-market ratio, from the
daily CRSP raw return on the quarterly dividend pay date (day 0) for every stock. Benchmark
portfolio assignments based on firm size and book-to-market ratio are taken from Ken French’s
website. Benchmark portfolio returns are based on the work of Daniel, Grinblatt, Titman and
Wermers (DGTW, 1997) and Wermers (2003). These data are obtained from Russ Wermers’s
website.
We obtain the pay dates of all quarterly cash dividend distributions from CRSP (distcd = 1200 1499), for all ordinary common shares traded on the NYSE, AMEX, and NASDAQ (CRSP share
code is 10 or 11). If a pay date is on a weekend, we recognize that the dividend payment will
occur on the next business day. We keep all quarterly dividend events for which: (a) the number
of days between the ex-dividend day and the pay date is at least 10 and no more than 45; (b) the
number of days between the ex-dividend day and the record date is at least 2 and no more than 7;
and (c) there are at least 20 days between a firm’s consecutive pay dates. These screens help to
ensure that we ignore events with coding errors.
Quarterly Explanatory Variables:
1) DRIP = 1, if the firm has a company-sponsored dividend reinvestment plan, or 0 otherwise.
The list of DRIP firms is available once per year for the years, 1996 - 2012, from American
Association of Individual Investors (AAII);
2) lnsize = natural log of the firm’s daily market capitalization on day -10, ten days before the
dividend pay date (on day 0), where daily market capitalization is taken from CRSP;
3) yld = firm’s dividend yield, computed as the cash dividend amount divided by the firm’s
stock price on day -10, where the dividend amount is taken from CRSP;
4) Lpct_INST = percent of shares outstanding owned by institutional investors for the
previous quarter, taken from Thompson’s 13F filings;
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5) spread = daily percentage closing bid-ask spread, as a percent of the daily closing price, on
day -10, taken from CRSP.
6) log_HiLo = intraday stock return volatility measured as the natural log of the ratio of the
daily high and low prices, on day -10, taken from CRSP;
It is important to note that all explanatory variables are known at least one week prior to the
dividend pay date. The results presented in this paper are therefore allow trading strategies that
can actually be implemented.
Your Assignment:
Estimate the following panel regression model:
Model: bm_ar0 = AR(0) = drip yld lnsize Lpct_INST spread log_hilo;
Use the following four techniques to estimate this panel regression:
1. Fama-MacBeth approach,
2. Panel regression with standard errors clustered on the firm (i) and the quarter (n);
3. Panel regression with fixed effects for both the firm (i) and the quarter (n);
4. Panel regression with fixed effects for the firm (i) only.
Present and compare the results from these alternative regression techniques.
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