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An event study is designed to examine
market reactions to, and abnormal returns
around specific information-imparting
events.
These events can be market-wide or firmspecific
The event can occur at the same point in time
for all stocks (9/11) or at different points in
time for each stock (M&A Announcement)
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The day or time of the event is day (or time) 0.
You are looking to see if there is unusual
movement either on day 0, before day 0, or
after day 0.
You want to find out if you can show that there
is a 95% chance that the event caused the
unusual movement.
Knowing that an event caused or didn’t cause
an abnormal return can help us predict stock
reactions to similar events in the future.
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1. Clearly identify the event and the date on
which the event announcement occurred
Note that the announcement date is preferred
to the date that the event took place if you
expect prices to react to the announcement
2. Find returns around the event date
Usually daily, but can be more frequent (CNBC
Reports) or less frequent
3. Determine your sample size and collect all
the pertinent data in your sample
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4. Determine the event window
Days –n to +n
5. Control for the Market
Determine how much of each stock’s
movement was due to market movement
separate from the event. This will give us the
excess returns we are looking for.
6. Average the excess returns across all stocks
in the sample for each day in the event
window
Equally-weighted or value-weighted
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7. Calculate the standard errors of the excess returns
Sample standard deviation divided by the square
root of the sample size
7. Calculate t statistics to test for statistical
significance
Divide the average abnormal return for the day by
the standard error and compare with hurdle rate of
t=1.96
8. Plot cumulative abnormal returns on a graph to
give a clear visual description of what you found.
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9. If desired, calculate a long-short portfolio
Determine the results of a portfolio where
you go long the top decile (or 20%) and short
the bottom decile (or 20%). This works best if
the top decile has positive abnormal returns
and the bottom decile has negative abnormal
returns
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No Risk Adjustment
◦ Actual Rit – Actual Rm,t
◦ Often close enough for short-term movements
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Risk Adjustment using Beta
◦ Actual Rit – [ai + Bi[Actual Rm,t]
◦ ai and Bi must be determined outside event window
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Risk Adjustment using Matched Firms
◦ Actual Rit – [Actual Rmatch,t]
◦ Find matches in same industry with closest possible
market cap
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M & A Announcements
◦ How do stocks react before, at, and after an
announcement that there is a bid to acquire them?
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IPO Long-Run Returns
◦ How do stocks do over the three years following
their IPO? Do those with higher initial returns do
better than those with lower initial returns?
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Reaction to CNBC Reports
◦ If a stock is mentioned favorably or unfavorably on
CNBC, does it affect its price? Is so, how quickly?
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Momentum in Weekly Returns
◦ If we go long the stocks with the top decile of
weekly returns and short the bottom decile, how
will our portfolio perform over the next 52 weeks?
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Stocks Within Mutual Funds
◦ Ranking mutual funds based on their inflow of new
money, we can form a portfolio where we go long
the stocks that the top 20% hold and short the
stocks that the bottom 20% hold. How well do these
stocks do over the next 40 months?
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Name Changes
◦ Was there an abnormal return when companies
changed their name to include “dot com” between
January 1998 and March 1999?
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Adjusted Median Return to Date
10.0
Median Percentage Return to Date
5.0
0.0
-5.0
-10.0
-15.0
-20.0
-25.0
-30.0
-35.0
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4
7
10
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Init Ret >= 13.75%
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Month
22
25
28
31
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Init Ret < 13.75%
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Do your own Event Study
Find out if being added to the S&P 500 has an
impact on a stock’s return
Randomly select 100 stocks that were added
to the S&P 500 between 1/2000 and 10/2009
Stocks and dates are provided
Get price data on Yahoo Finance
Use market model to find abnormal returns
Graph CARs from Event Day-10 to Event
Day+11
Details on class website
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