the Event Study Webpage

by Don Cram

http://web.mit.edu/doncram/www/eventstudy.html

Under construction...suggestions/references appreciated.

What is an event study? An event study, in economics/finance/accounting research, is an analysis of whether there was a statistically significant reaction in financial markets to past occurences of a given type of event that is hypothesized to affect public firms' market values.

To go further:

The event that affects a firm's market value may be within the firm's control, such as the event of the announcement of a stock split. Or the event may be outside the firm's control, such as the event of a legislative act being passed, or a regulatory ruling being announced, that will affect the firm's future operations in some way.

The basic recipe for an event study is:

(1) to collect a number of such events, i.e. a list of firms and dates, perhaps by running a literature search to find news announcements,
(2) to run programs that look up stock price changes for those firms in periods around those dates, and also changes in a market-wide index in the same periods (e.g., collecting this data from databases such as the huge CRSP database of daily stock market returns for U.S. firms from July 1962 through Dec. 31, 1997),
(3) to run additional programs that evaluate whether event-period price changes for the list of firms are abnormally large, compared to usual returns for those firms and controlling for market-wide effects on all firms' returns during the event periods, and,
(4) optionally, to additionally run further regressions to explain the abnormal returns in (3), by external firm characteristics.

A large academic literature has built up reflecting debate on how to do the evaluation (3) in a statistically sound way. Issues, for example, include how to measure what usual returns are for a firm, how to summarize returns during an event-period, how to control for market-wide effects.

Selected general sources on the event study methodology (in alphabetical order by first author) include:

Armitage, Seth "Event Study Methods and Evidence on Their Performance", Journal of Economic Surveys, vol 8, no 4, 1995, pages 25-52.
Binder, John J., professor in Dept. of Finance, University of Illinois, Chicago, has written a comprehensive review: "The Event Study Methodology Since 1969". Published in _Review of Quantitative Finance and Accounting_.
Bowman, Robert G. "Understanding and Conducting Event Studies" Journal of Business Finance and Accounting, Winter 1983, vol 10 number 4, pages 561-584.
Patrick L. Brockett, Hwei-Mei Chen and James R. Garven "Event Study Methodology: A New and Stochastically Flexible Approach", at http://aria.org/research/eventstudy.html (as of 2/99) Previously was downloadable in acrobat or postscript, dated June 1994, reportedly at http://www.hexanet.com.br:80/yp/pages/rbuutexx.edu/finance/wpa/eventstc.htm. An alternative URL that may work better is http://205.230.252.2:80/Finance/WPA/eventstudy.html.
Campbell, John Y., Andrew W. Lo and A. Craig MacKinlay, "Event-Study Analysis", Chapter 4 in _The Econometrics of Financial Markets_ (Princeton University Press ISBN 0-691-04301-9, 1997) pp149-180.
Arnold R. Cowan and Anne M.A. Sergeant, "Trading Frequency and Event Study Test Specification" at http://econwpa.wustl.edu:80/eprints/fin/papers/9610/9610002.abs.
Arnold R. Cowan and Anne M. A. Sergeant, "Interacting Biases, Non-Normal Return Distributions and the Performance of Parametric and Bootstrap Tests for Long-Horizon Event Studies", (announced on sci.finance.abstracts 11/96; event studies, long-horizon performance, abnormal returns, nonparametric tests, bootstrap), October, 1996.
Dombrow, Jonathan, Mauricio Rodriguez, and C. F. Sirmans, "A Complete Non-parametric Event Study Approach", under review at Review of Quantitative Finance and Accounting. See http://voltaire.is.tcu.edu/~mrodriguez/research/ (2/99)
Glascock, John L. and Imre Karafiath, "Statistical Inference in Event Studies Using Multiple Regression" in Alternative Ideas in Real Estate Investment, Arthur L. Schwartz and Steven D. Kapplin, editors. This is volume 2 of Real Estate Research Issues, sponsored by the American Real Estate Society. Published by Kluwer in 1995.
LeClere, Marc J. "The Occurence and Timing of Events: The Application of Event History Models in Accounting and Finance", working paper dated Sept 1999, available at http://papers.ssrn.com/paper.taf?abstract_id=181553 (announced on SSRN and added 11/99). This is not about event studies per se, but rather about hazard-rate and similar models that explain occurences of events. It is included here for comparison sake.
Maddala, G. S. "Applications of Limited Dependent Variable Models in Finance", in G. S. Maddala and C. R. Rao, eds., _Handbook of Statistics_, Vol 14, 1996, p. 553-566. Provides 2 pages of comments on event study methodology. (added 4/99)
Marais, Laurentius and Katherine Schipper, "Applications of Event Study Methods in Litigation Support" in _Litigation Services Handbook_, edited by Peter B. Frank, Michael J. Wagner and Roman L. Weil (New York: John Wiley and Sons, 1991 or 2nd edition, 1995). This is apparently based on a teaching note by Katherine Schipper, "Notes on event studies; prepared for Business 431-81; Fall quarter, 1992", itself an unpublished, very helpful non-technical explanation of event studies. This work includes discussion of event study approaches to practical applications such as in litigation support.
MacKinlay, A. Craig "Event Studies in Economics and Finance", Journal of Economic Literature, March 1997. (added 1/98)
McWilliams, A., and D. Siegel "Event Studies in Management Research: Theoretical and Empirical Issues", Academy of Management Journal, 40, 1997, p 626-657. (added 2/99)
Peterson, Pamela P. "Event Studies: A Review of Issues and Methodology", Quarterly Journal of Business and Economics, 28, pages 36-66, 1989. (added 8/99)
N. R. Prabhala "Conditional Methods in Event-Studies and an Equilibrium Justification for Standard Event-Study Procedures" in Review of Financial Studies, Vol. 10 No. 1. (announced on FEN Journal of Financial Abstracts Series C March 26, 1997) This paper defends traditional event study statistics from recent criticisms that conditional event studies are misspecified.
Michael Salinger "Standard Errors in Event Studies", Journal of Financial and Quantitative Analysis, Vol 27 No 1 March 1992.
Michael Salinger "Value Event Studies", The Review of Economics and Statistics, 1992.
Michael Salinger "When Do Peeping Toms See Something (Statistically) Significant", March 1994, unpublished working paper.
K. R. Sawyer, professor in the Department of Accounting and Finance, University of Melbourne, Australia. "How Eventful Are Event Studies?" 1997 working paper. Email address k.sawyer @ ecomfac.unimelb.edu.au.
Rex Thompson "Empirical Methods of Event Studies in Corporate Finance", Chapter 29 in _Handbooks in OR & MS_, Vol. 9, R. Jarrow et al., eds., Elsevier Science B.V. 1995.

Classic event study references are included in Andrew Karolyi's syllabus for his Winter 1995 course taught at Ohio State, Fin 921: Empirical Research in Finance at http://www.cob.ohio-state.edu/dept/fin/921/karolyi/outline.htm, as of 5 August 1997 and still available as of 2/99. Karolyi is now at University of Western Ontario (2/99). In the Ohio State course, Karolyi included the following articles under Event Study Methodology (with the Boehmer article required reading for his course and the others supplementary):

Ball, C. and W. Torous, 1988, "Investigating Security Price Performance in the Presence of Event Date Uncertainty," Journal of Financial Economics 22, 123-154.
Binder, J., 1985, "On the Use of the Multivariate Regression Model in Event Studies," Journal of Accounting Research 23, 370-383.
Boehmer, E., Musumeci, J. and A. Poulsen, 1991, "Event- Study Methodology Under Conditions of Event-Induced Variance," Journal of Financial Economics 30, 253-272.
Brown, S. and J. Warner, 1985, "Using Daily Stock Returns: The Case of Event Studies," Journal of Financial Economics 14, 3-31.
Fama, E., 1976, Foundations of Finance. New York: Basic Books. Chapters 3 and 4.
Fama, E., Fisher, L., Jensen, M. and R. Roll, 1969, "The Adjustment of Stock Prices to New Information," International Economic Review 10, 1-21.
Malatesta, P., 1986, "Measuring Abnormal Performance: The Event Parameter Approach Using Joint Generalized Least Squares," Journal of Financial and Quantitative Analysis 21, 27-38.
Sefcik, S. and R. Thompson, 1986, "An Approach to Statistical Inference in Cross-sectional Models with Security Abnormal Returns as Dependent Variable," Journal of Accounting Research 24, 316-334.
Thompson, R., 1985, "Conditioning the Return-Generating Process on Firm Specific Events: A Discussion of Event Study Methods," Journal of Financial and Quantitative Analysis 20, 151-168.

A similar online list with some interesting references is the Professor Frank Finn's reading list for University of Queensland course 455 in business finance, at http://www.commerce.uq.edu.au/subjects/co455/texts.html (as of 2/99). Some other important papers are:

Dimson, Elroy, 1979 "Risk Measurement When Shares are Subject to Infrequent Trading", vol 7, 197-226.
Scholes, Myron and J. Williams, 1977, "Estimating Betas from Nonsynchronous Data", Journal of Financial Economics, vol 5, 309-328.

Programs for event studies

See discussion in the CRSP-L FAQ webpage at http://www-leland.stanford.edu/class/gsb/crsp/CRSP-L/FAQ.html#EVENT1.
Eventus is a commercial software package developed and sold by finance professor Arnold Cowan.
Pam Peterson's FIN6842 exercise on Event Study at FSU.
Olivier Ledroit at UCLA has another event study exercise in course Management 239C.
Glascock and Karafiath (1995, cited above) include some SAS code for their "short-cut" version of an event study: they suggest running one regression spanning beta estimation and event windows, with dummy variables on each event day.
Patricia Dechow and Thomas Lys and Jowell S. Sabino, "Using long-window return studies in addressing recognition issues: An evaluation of alternative research approaches", July 1996. Dechow, Lys, and Sabino (more specifically: Patricia Dechow and Thomas Lys and Jowell S. Sabino, "Using long-window return studies in addressing recognition issues: An evaluation of alternative research approaches", July 1996) promise availability of a SAS simulation program (which is related to, but does not include an event study?).

Data for event studies:

CRSP: Most academic research employing event studies on U.S. securities market data uses daily or monthly stock returns from the CRSP (Center for Research in Security Prices) data. For information on CRSP data and access programs, see CRSP Data Access and Analysis webpage which surveys all known CRSP-related information resources published and/or on the WWW. These include: the CRSP-L email list and FAQ webpage; university webpages on how to access CRSP; papers and technical notes on access and analysis of CRSP data.

Event study applications are too numerous to list, but a starter sampling is as follows:

That required reporting of annual toxic chemical releases by U.S. firms cause stock market reactions, a pioneering demonstration of environmental management effect in the stock market:
Walter G. Blacconiere and W. Dana Northcutt, "Environmental Information and Market Reactions to Environmental Legislation", Journal of Accounting, Auditing & Finance, Spring, 1997, pages 149-178.
That corporate news announcements do NOT move the market, in the Mexican stock market, due probably to insider trading:
Utpal Bhattacharya, Hazem Daouk, Brian Jorgenson, and Carl-Heinrich Kehr "When an Event is Not an Event: The Curious Case of an Emerging Market" (forthcoming in Journal of Financial Economics), working paper dated 12/98 available at http://ashem.bus.indiana.edu/finweb/UB.html (added 2/99).

Event study applications not yet published in a peer-reviewed journal, whose drafts are available on the web in full text:

Subramani, Mani, and Eric Walden "The DOT COM EFFECT: The Impact of E-commerce Announcements on the Market Value of Firms" http://akindofmagic.com/~ewalden/documents/subramani_walden_icis.pdf (as of 1/2000).
Jeannie D. Johnston, "A closer examination of the Foreign GAAP reconciliation issue" http://www.usc.edu/dept/accounting/aaanational/paper1b.html (as of 2/99)
That International Monetary Fund (IMF) bailouts affected equity values of banks invested in South Korea:
"The Impact of IMF Bailouts on International Bank Creditors' Equity Values--An Event Study of South Korea's Case", by Zhaohui Zhang http://chimera.acs.ttu.edu/~ogzzh/paper1.html (as of 2/99)

Note event studies of the efficiency of markets may be classified at G14 in the JEL classification system. Please send suggestions, comments, and requests.

Email: doncram@mit.edu

Return to my NEW home page http://web.mit.edu/doncram/www/

(broken counter below, need to fix) hits since 1/18/97.