Event study methodology pdf

MacKinlay did this research in The result of his study is shown above. MacKinlay categorized the companies based on whether the companies reported strong profits, normal earnings or a loss in the earnings announcements. The results of his event studies show that companies which reported good news showed higher cumulative abnormal returns, especially on the event day Day 0. Management An event study can be used to access the effectiveness of management and the decisions they make An example will be the appointment of a new CEO.

The event month will be the month in which the CEO is appointed, and the dependent variable will be the stock price or profits of the company. We can take this research to a higher level by dividing the CEOs into groups based on their age. The CAR should increase the most for CEOs who are young as he will be most motivated to perform in order to boost their personal reputation and value.

It was found that companies perform more efficiently after a forced management change, with the greatest improvement in performance in the year after the change. This suggests that forced management change is most probably a good sign for the company, as we are replacing an underperforming manager with someone better. Marketing The event study methodology can be used to measure the effectiveness of an advertising campaign.

The dependent variable will be the abnormal sales level per month while the event month will be the month whereby the advertising campaign is launched. Abnormal sales 16 14 12 10 8 Sales 6 4 2 0 -5 -4 -3 -2 -1 0 1 2 3 4 5 Actual studies done on this area include the effect of celebrity endorsement done by Agrawal and Kamakura , and the effect of the adoption of a dot com name by companies done by Michael J Cooper, Orlin Dimitrov, P.

Raghavendra Rau The graph above shows the findings of the research done by Agrawal and Kamakura. It shows that celebrity endorsement often leads to a positive abnormal return, although there are many cases reporting small or zero abnormal returns, and even some cases with negative abnormal returns. This graph shows the findings of the research done by! For example, when a property company changes its accounting policy from valuating assets at book value to valuating assets at fair value, its value might increase due to the fact that the fair value of its property assets usually appreciate in value over time.

This shows the result of a research done by Baruch Lev on the effects of accounting regulations on stock prices of oil and gas companies. FC firms are firms that use the full cost method while SE firms are those that use the successful effort method to account for exploration cost. We can see that significant negative abnormal returns happened due to the accounting changes brought by the exposure draft.

List examples of the use of the event study methodology in non- academic settings. The event study methodology can be applied to many situations in life as long as they satisfy the following conditions: 1. Event is relevant to the dependent variable 2.

We can remove any confounding effect 3. There is a specific event time 4. I can use the market model to estimate how many extra or less customers I will get due to this promotion. Rmt can be found by observing restaurants which adopted the same policy and sell similar cuisine. After we have compiled a reasonable sample size, we can average the total number of customers and find the Rm.

Next we have to estimate the alpha and beta based on past data of their customer arrival rate and the Rm. Finally we can find the abnormal number of customers for each restaurant using the above formula, and the average abnormal number of customers by averaging the figures.

This figure will be helpful in our decision of whether the happy hour promotion is profitable or not. We can also use the event study methodology to evaluate the performance of a tuition teacher. The sample will comprise of the students taught by that teacher. Rmt would be the average results of the students taught by that tuition teacher. We can compare the results of each student with that of the Rm to find the alpha and beta.

After that we can find the abnormal result AR for each student using the market model. Finally, by looking at the AAR for all the students, we will know whether the tuition teacher is good at his job and whether to employ him. Discuss the limitations of this research methodology Although there are many benefits to using event studies in our research, there are still some limitations to the model.

Firstly, the event study methodology depends on the assumption of an efficient market. This assumption is not valid in many situations. The length of time required for individual investors to respond to event signals is random and therefore, the implication is that markets could exhibit market inefficiencies because prices do not instantly or fully reflect all available information.

Individual stock prices usually increase in series of steps as investors normally respond in waves as in the Elliot wave theory. We can only use the CAR graph in that case. Secondly, the methodology provide estimates of the short-run impact on shareholders only and fail to consider many other effects of the event.

Even if we assume away the problems of inefficient markets, we might have further problems if the companies under study are contaminated by ensuing events. Concurrent events in different stocks might weaken or reinforce one another, resulting in abnormal returns that are not caused by the specific event of interest. This will make the results of our event study Thirdly, the results of the event studies are sensitive to changes in your research design.

Similarly a change in your estimation window will give you different alphas and betas, which will also affect your results. The choice of sample size will also result in differences in your results.

The sensitivity of event studies will result in different conclusions being drawn by researcher studying the same event, thereby making it hard for us to choose which result to believe in. Equation 1 describes the model formally. Such an analysis performed for multiple events of the same event type i. Typical abnormal returns associated with a distinct point of time before or after the event day are defined as follows. To measure the total impact of an event over a particular time period termed the event window , one can add up individual abnormal returns to create a cumulative abnormal return.

Equation 2 formally shows this practice. Figure 1 plots the CAR values of two different corporate event types, FDA approvals, and the issuance of special dividends as they change when the event window is gradually extended. The figure suggests that the capital market perceives both event types as good news. In a sample event study that holds multiple observations of individual event types e.

Equation 3 shows the formal equation for CAARs and Figure 2 illustrates CAARs and their standard deviations at the example of a ten-year study in the global insurance industry Schimmer, The presented CAARs represent the average stock market responses in percent to press releases describing different types of corporate decisions.

In addition to the above-presented introduction to the event study methodology, you may find the subsequent third-party video on youtube helpful. Neuhierl, A. Schimmer, M.