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Lecture 4

FINE 434 Lecture Notes - Event Study, Abnormal Return, Null Hypothesis
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3 Pages
75 Views
Winter 2017

Department
Finance
Course Code
FINE 434
Professor
Jiro Kondo
Lecture
4

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Weaknesses:
- Might not be focused on economic value.
- Memories of past results can be hazy and biased.
- Very low participation rate.
Methodologies: Clinical research
Analyse one transaction in depth.
Strengths:
- In-depth analysis of actual experience.
- Ideal for discovering new patterns and developing new hypotheses.
Weaknesses:
- Ill-suited to hypothesis testing.
- Results often not generalizable.
Methodologies: Accounting study
Examine reported financial results of acquirers, before and after acquisitions.
Strengths:
- Credibility (checked by auditors).
- Based on measures that are often used by investors.
Weaknesses:
- Data before and after might be non-comparable.
- Backward-looking.
- Differences across companies and countries.
Methodologies: Event study
Event study: Academic study that empirically examines price responses to financial decisions.
In event studies, researchers collect the data on which a sample of firms made similar
announcements (e.g., initiating new dividends).
Next, they examine stock returns on the event’s announcement date and the days immediately
before and after the event, averaged across all firms in the sample.
The fact that there is a sample of firms/events allows one to perform a statistical analysis of the
magnitude and determinants of stock price reactions.

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Description
Weaknesses: - Might not be focused on economic value. - Memories of past results can be hazy and biased. - Very low participation rate. Methodologies: Clinical research Analyse one transaction in depth. Strengths: - In-depth analysis of actual experience. - Ideal for discovering new patterns and developing new hypotheses. Weaknesses: - Ill-suited to hypothesis testing. - Results often not generalizable. Methodologies: Accounting study Examine reported financial results of acquirers, before and after acquisitions. Strengths: - Credibility (checked by auditors). - Based on measures that are often used by investors. Weaknesses: - Data before and after might be non-comparable. - Backward-looking. - Differences across companies and countries. Methodologies: Event study Event study: Academic study that empirically examines price responses to financial decisions. In event studies, researchers collect the data on which a sample of firms made similar announcements (e.g., initiating new dividends). Next, they examine stock returns on the event’s announcement date and the days immediately before and after the event, averaged across all firms in the sample. The fact that there is a sample of firms/events allows one to perform a statistical analysis of the magnitude and determinants of stock price reactions. Strengths: - Direct measure of shareholder wealth impact. - Forward-looking. Weaknesses: - Relies on strong assumptions about stock markets (i.e., semi-strong form efficiency). - Vulnerable to confounding events. Methodologies: Concluding remarks Scientific approach: Formulating and testing a null hypothesis. Key value: t-statistic; results significantly different from zero with 95% confidence if: - t-statistic > 2 - p-value < 0.05 Accounting and event studies are most scientific, while surveys and case studies are descriptive. Event study: Introduction An event study generally consists of three steps: - Identify the event of interest and the timing of the event. - Calculate normal stock returns using a benchmark model. - Calculate and analyse abnormal returns around the event date. Event study: Step 1: Identify the event In general, an event is an (observed) decision or announcement of the firm’s management. The event date is most often the
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