An Investigation of Event Study Methodologies with Clustered Events and Event Day Uncertainty

  • SANG Lee
  • OSCAR Varela
Article

Abstract

The specification and power of mean-adjusted, market and quadratic models in event studies using OLS, Patell, Jaffe and GLS are examined. Simulation is used with security and portfolio returns to capture different cross correlations. The market model is always superior in specification and power compared to the mean-adjusted and quadratic models. The use of OLS with the market model is supported in the absence of clustered events and event day uncertainty, whereas use of Jaffe with the market model is supported in the presence of these problems.

Event Study Methods Contemporaneous Correlations Event Clustering Event Day Uncertainty 

Preview

Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.

References

  1. Ball, Clifford A., and Walter N. Tourous, “Investigating Security-Price Performance in the Presence of EventDate Uncertainty.” Journal of Financial Economics 22, 123–153, (1988).CrossRefGoogle Scholar
  2. Ball, Ray, and Philip Brown, “An Empirical Evaluation of Accounting Numbers.” Journal of Accounting Research 6, 159–178, (1968).Google Scholar
  3. Barone-Adesi, G., “Arbitrage Equilibrium with Skewed Asset Returns.” Journal of Financial and Quantitative Analysis 20, 299–313, (September 1985).Google Scholar
  4. Beaver, W. H., R. Clarke, and W. Wright, “The Association Between Unsystematic Security Returns and the Magnitude of the Earnings Forecast Error.” Journal of Accounting Research 17, 36–40, (Autumn 1979).Google Scholar
  5. Beaver, W. H., and W. R. Landsman. The Incremental Information Content of FAS 33 Disclosures FASB Research Report, Stamford, CT: FASB, 1983.Google Scholar
  6. Bernard, V. L., “Cross-Sectional Dependence and Problems in Inference in Market-Based Accounting Research.” Journal of Accounting Research 25, 1–48, (Spring 1987).Google Scholar
  7. Biddle, G., and F. Lindahl, “Stock Price Reaction to LIFO Adoptions.” Journal of Accounting Research 20, 551–588, (Autumn 1982).Google Scholar
  8. Boehmer, Ekkehart, Jim Musumeci, and Annette B. Poulsen. “Event-Study Methodology Under Conditions of Event-Induced Variance.” Journal of Financial Economics 30, 253–272, (1991).Google Scholar
  9. Brown, Stephen J., and Jerold B. Warner, “Measuring Security Price Performance.” Journal of Financial Economics 8, 205–258, (1980).Google Scholar
  10. Brown, Stephen J., and Jerold B. Warner, “Using Daily Stock Returns: The Case of Event Studies.” Journal of Financial Economics 14, 3–31, (March 1985).Google Scholar
  11. Campbell, Cynthia J., and Charles E. Wasley. “Measuring Security Price Performance Using Daily NASDAQ Returns” Journal of Financial Economics 33, 73–92, (1993).Google Scholar
  12. Chandra, Ramesh, and Bala V. Balachandran, “More Powerful Portfolio Approaches to Regressing Abnormal Returns on Firm-Specific Variables for Cross-Sectional Studies.” Journal of Finance 47, 2055–2070, (December 1992).Google Scholar
  13. Chandra, R., S. Moriarity, and G. L. Willinger, “A Reexamination of the Power of Alternative Return Generating Models and the Effect of Accounting for Cross-Sectional Dependencies in Event Studies.” Journal of Accounting Research 28, 398–408, (Autumn 1990).Google Scholar
  14. Collins, D. W., and W. T. Dent, “A Comparison of Alternative Testing Methodologies Used in Capital Market Research” Journal of Accounting Research 22, 48–84, (Spring 1984).Google Scholar
  15. Corrado, Charles J., “A Nonparametric Test for Abnormal Security-Price Performance in Event Studies.” Journal of Financial Economics 23, 385–395, (1989).Google Scholar
  16. Corrado, Charles J., “Testing for Abnormal Security-Price Performance Under Conditions of Event-Period Uncertainty.” Review of Quantitative Finance and Accounting 3, 127–148, (1993).Google Scholar
  17. Fama, Eugene F., Lawrence Fisher, Michael Jensen, and Richard Roll, “The Adjustment of Stock Prices to New Information.” International Economic Review 10, 1–21, (February 1969).Google Scholar
  18. Friend, I., and R. Westerfield, “Co-Skewness and Capital Asset Pricing.” Journal of Finance 35, 897–914, (September 1980).Google Scholar
  19. Jaffe, J. F., “Special Information and Insider Trading.” Journal of Business 47, 410–428, (July 1974).Google Scholar
  20. Judge, George G., R. Carter Hill, William E. Griffiths, Helmut Lutkepohl, and Tsoung-Chao Lee, Introduction to the Theory and Practice of Econometrics. John Wiley and Sons, Inc., 2nd edition, 1988.Google Scholar
  21. Kraus, A., and R. Litzenberger, “Skewness Preference and the Valuation of Risky Assets.” Journal of Finance 31, 1085–1094, (September 1976).Google Scholar
  22. Leftwich, R., “Evidence on the Impact of Mandatory Changes in Accounting Principles on Corporate Loan Agreements.” Journal of Accounting and Economics 3, 3–36, (1981).Google Scholar
  23. Lim, K., “A New Test of the Three-Moment Capital Asset Pricing Model,” Journal of Financial and Quantitative Analysis 24, 205–216, (June 1989).Google Scholar
  24. Malatesta, Paul H., “Measuring Abnormal Performance: The Event Parameter Approach Using Joint Generalized Least Squares.” Journal of Financial and Quantitative Analysis 21, 27–38, (March 1986).Google Scholar
  25. Mandelker, G., “Risk and Return: The Case of Merging Firms.” Journal of Financial Economics 1, 303–335, (December 1974).Google Scholar
  26. McDonald, Bill, “Event Studies and Systems Methods: Some Additional Evidence.” Journal of Financial and Quantitative Analysis 22, 495–504, (December 1987).Google Scholar
  27. Patell, James, “Corporate Forecasts of Earnings Per Share and Stock Price Behavior: Empirical Tests.” Journal of Accounting Research 14, 246–276, (1976).Google Scholar
  28. Schipper, Katharine, and Rex Thompson, “The Impact of Merger-Related Regulation on the Shareholders of Acquiring Firms.” Journal of Accounting Research 21, 184–221, (Spring 1983).Google Scholar
  29. Scott, R., and P. Horvath, “On the Direction of Preference for Moments of Higher Order than the Variance.” Journal of Finance 35, 915–919, (September 1980).Google Scholar
  30. Sears, S., and K. C. J. Wei, “The Structure of Skewness Preferences in Asset Pricing Models with Higher Moments: An Empirical Test.” Financial Review 23, 25–38, (February 1988).Google Scholar
  31. Strong, Norman, “Modelling Abnormal Returns: A Review Article.” Journal of Business Finance and Accounting 19, 533–553, (June 1992).Google Scholar
  32. Theil, H., Principles of Econometrics New York, NY: Wiley, 1971.Google Scholar
  33. Varela, Oscar, and Sang H. Lee, “International Listings, the Security Market Line and Capital Market Integration: The Case of U.S. Listings on the London Stock Exchange.” Journal of Business Finance and Accounting 20, 843–863, (November 1993a).Google Scholar
  34. Varela, Oscar, and Sang H. Lee, “The Combined Effects of International Listing on the Security Market Line and Systematic Risk for U.S. Listings on the London and Tokyo Stock Exchanges,” in International Financial Market Integration, Stanley R. Stansell, Ed., Basil Blackwell, Oxford and Cambridge, Chapter 18, 367–388, 1993b.Google Scholar

Copyright information

© Kluwer Academic Publishers 1997

Authors and Affiliations

  • SANG Lee
    • 1
    • 2
  • OSCAR Varela
    • 3
  1. 1.International Securities DivisionKorea
  2. 2.The Korea Securities Research Institute, (The Korea Securities Dealers Association)Youngdeungpo-GU, SeoulKorea
  3. 3.Department of Economics and FinanceUniversity of New OrleansNew OrleansUSA

Personalised recommendations