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Event Studies and the Measurement of Abnormal Returns - Essay Example

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Event Studies and the Measurement of Abnormal Returns

This paper is aimed at identifying the events of stock market and making a case study of one of the events. Many studies were carried out for the events of stock market. Study was made on the influences of stock splits and stock prices by Dolley (1933). Publication of papers in the leading business journals indicate that the event studies were done by Myers (1948), by Barker (1956), (1957), (1958) and by Ashley (1962). Event studies were introduced to the financial experts and managers through two papers first by Ball Brown in 1968 and second by Fama et al in 1969. The methodology of studying events of the capital markets have developed and advanced manifold since then and yet the two papers of Brown and Fama provide the core elements of an event. MacKinlay (1997) The market model developed by Ball Brown and Fama contributed in their success. Their model was patterned after the Capital Asset Pricing Model (CAPM) developed in 1964 by Sharpe. The data from the Center for Research in Security Prices (CRSP) at University of Chicago was used by Ball Brown and Fama which also made it a standard source for research for the entire capital markets. The development of computer hardware and statistical analytical software and its increasing access and usage also played important role in the success of event studies. The key issues of capital structure market were made prominent by papers of Modigliani and Miller (1958), (1961) and (1963) which made studies of event a key empirical tool. The events that can impact capital market include declaration of dividends or earnings, splits of stock, mergers of two or more companies, listings of new companies in exchanges, initial public offerings (IPO) and changes of people at key management positions. The impact of such events can be underreaction, overreaction, abnormal returns and reversals. Corrado (2011) Literature Review There are many types of event studies in the literature such as examination of Return Variances by Beaver (1968), and Patell (1976), studies on volume of stock trading by Beaver (1968) and Campbell and Wasley (1996), analyzes of operating performance by Barber and Lyon (1996) and management of earnings through discretionary accruals by Dechow, Cloan, and Sweeney (1995) and Kothari, Leone, and Wasley (2005). However our paper is focused only the mean stock prices. Corrado (2011) The researches during past thirty years have not changed the basic statistical format and it still concentrate around the measurement of mean and cumulative mean of abnormal return before and after the event. The only major changes that took place are the periods of the data for which mean is calculated. Earlier data of returns were used on monthly basis but today data are used on daily and intraday basis. This helps in measuring the abnormal returns more accurately and determines its effects more descriptively. The second change which has come in the event studies is in the ways of estimating the abnormal returns for events that are long-horizon. The new development of French 3 factor model in pricing asset by Fama also brought some changes in event studies methodology. In spite of these changes, there are serious limitations in the methods of long-horizon and extreme caution is required while making any inferences from it. (Kothari and Warner, 1997, p.301) The model of event study constitute examination of behaviour of the stock ...Show more

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Event Studies and the Measurement of Abnormal Returns Introduction Event is the occurrence of any such activity that impacts its environment and triggers many other activities and happenings. It is a continuous process of everybody’s life. Some events are very common such as birth of a child, death of a beloved one, marriage ceremonies, etc…
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Event Studies and the Measurement of Abnormal Returns essay example
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