Event Study Analysis: CLM Chapter 4

Definition:
An event study attempts to measure the valuation effects of a corporate event, such as a merger or earnings announcement, by examining the response of the stockprice around the announcement of the event. One underlying assumption is that the market processes information about the event in an efficient and unbiased manner (more on this later).

Event Study Analysis
The steps for an event study are as follows:
– – – – – – – Event Definition Selection Criteria Normal and Abnormal Return Measurement Estimation Procedure Testing Procedure Empirical Results Interpretation

Event Study Analysis
The time line for a typical event study is shown below in event time:

T0

T1

0

T2

T3

The interval T0-T1is the estimation period The interval T1-T2 is the event window Time 0 is the event date in calendar time The interval T2-T3 is the post-event window There is often a gap between the estimation and event periods

Models for measuring normal performance
In an event study we wish to calculate the abnormal performance associated with an event. To do so, we need a model for normal returns.
– For example: Suppose a firm announces earnings and the stock price rises by 3%, but the market also went up 2% that day. How much of the 3% rise should be attributed to the announcement of earnings. • Fortunately, over short event windows (one or two days) the choice of normal return models usually has little effect on the results

Statistical or economic models for normal returns?
Statistical models of returns are derived purely from statistical assumptions about the behavior of returns Economic models apply restrictions to a statistical model that result from assumptions about investor behavior motivated by theory (i.e., CAPM)
– If the restrictions are true, we can calculate more precise measures of abnormal