Understanding and Conducting Event Studies

Abstract

An important methodological approach to market based empirical research in finance and accounting is the event study. Also known by other names such as residual analysis and abnormal performance index tests, these studies involve the analysis of security price behavior around the time of an information announcement or event. The approach has been used to study a variety of events such as the announcements of annual accounting earnings, accounting principle changes, large block trades and corporate mergers.A very broad interpretation should be placed on what constitutes an event.Research to date has primarily been in the context of an announcement as the event and usually an announcement emanating from a fm. However, announcements from outside of fm (e.g., from an accounting standard setting body) or more general "happenings" (e.g., an oil embargo) are includable as events.The broad class of research which can be labelled event studies can have numerous objectives and methodological adaptations. The diversity of the event study literature, both in terms of the range of topics covered and specific technique choices available, can be overwhelming. Yet, the structure of event studies is rather straightforward. The purpose of this paper is to provide a structure for the design of event studies, to differentiate them by type and to discuss some issues which are crucial to their understanding. What have come to be known as event studies have their modem roots in studies by Elall and Brown (1968) and Fama, Fisher, Jensen and Roll (1969).' Ball and Brown investigated the security price reaction to the unanticipated component of annual accounting earnings. They found that 85 to 90 percent of the information contained in the annual earnings report had been reflected in security prices before the announcement date. At the time this result was first published, many people, particularly in accounting, found it disconcerting, if not threatening. However, upon reflection, the result should not have been a surprise. The result implies an eminently reasonable information milieu where various sources, including interim earnings reports, are utilized in forming expectations of the annual earnings. The announcement of the annual accounting earnings report, after year end, then serves to revise the previous estimates. *The author is Associate Rofessor 01 Accounting at the University of Oregon. Earlier versions of this paper were presented at workshops at Momsh University and the University of Queenskmd. The author acknowledges the he@jid cornments of the workshop participants, particularly Bob Ofker. In addition, the comments of L. Dann, G. Foster, R. King, T. O'KeefeandB. Spicer helped to shmpen the exposition and organization of the paper. (

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“…In examining the frequency of consolidation announcements in conjunction with the desired level of granularity to track the abnormal returns, the researcher determined the daily stock return methodology seemed the most reasonable. The use of daily stock returns is supported in literature surrounding the use of stock returns in event studies (Bowman, 1983;Brown & Warner, 1985;MacKinlay, 1997). Brown and Warner (1985) in their paper titled, "Using Daily Stock Returns: The Case for Event Studies," examined the properties of daily stock returns and how the particular characteristics of these data affect event study methodologies.…”

Signaling mechanism of corporate payout policy: A case of Indian firms

“…A vast literature on the theory of event study methods also exists (Bowman, 1983;Brown & Warner, 1985). To determine an appropriate event window for this study, the different models used in an event study was referenced to determine the most appropriate event window.…”

“…An event study procedure (Brown and Warner, 1985), therefore, can be used to measure changes in share value around the dividend reduction or omission announcements. Bowman (1983) This methodology has proved to be very useful in a variety of finance related fields such as corporate finance, accounting, management, etc. Examples are studies of the impact of mergers and acquisitions, stock splits, new legislations, earning announcements, and other finance related events, on the profitability of firms.…”

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“… Lastly, the Market Model (MM) is the most widely-used methodology in event studies. It estimates the relationship between a share's returns and returns on the market by ordinary least squares (OLS) regression and the use of such a relationship to estimate expected returns, given returns on the market (Bowman, 1983). A one-factor OLS regression equation is R it =  i + i *R mt +e it , where  i and  i are regression coefficients and e it is the error term with a mean zero.…”