Methodology of an event study, Corporate Finance

Methodology of an Event Study

In this section we outline the methodology of an event study. In suc- ceeding sections we apply the methodology to a number of different cases. An event study is composed of three time frames: the estimation window (sometimes referred to as the control period), the event window, and the postevent window. The following chart illustrates these time frames:

1013_Methodology of an Event Study.png

The time line illustrates the timing sequence of an event. The length of the estimation window (also referred to as the control period) is rep- resented as T0 to T1. The event occurs at time 0, and the event window is represented as T1 + 1 to T2. The length of the postevent window is represented as T2 + 1 to T3. An event is defined as a point in time when a company makes an announcement or when a significant market event occurs. For example, if we are studying the impact of mergers and acquisitions on the stock market, the announcement date is normally the point of interest. If we are examining how the market reacts to earnings restatements, the event window begins on the date when a company announces its restatements. A common practice is to expand the event date to two trading days, the event date and the following trading day. This is done to capture the market movement if the event was announced immediately before the market closed or after market closing. The event window often starts a few trading days before the actual event day. The length of the event window is centered on the announcement and is normally three, five, or ten days. This procedure enables us to investigate prevent leakage of information. The postevent window is most often used to investigate the performance of a company following announcements such as a major acquisition or an IPO.

The estimation window is also used to determine the normal behaviour of a stock's return with respect to a market or industry index. The estimation of the stock's return in the estimation window requires us to define a model of "normal" behaviour: Most often we use a regression model for this purpose. 3 The usual length of the estimation window is 252 trading days (or one calendar year), but you may not always have this many days in your sample. If not, you need to determine whether the number of observations you do have is sufficient to produce robust results. As a guideline, you should have a minimum of 126 observations; if you have less than 126 observations in the estimation window, it is possible that the para meters of the market model will not indicate the true stock price movements, and thus the relationship between the stock returns and the market returns. The estimation window that you select is supposedly a period that was free of any problems-that is, a period that reflects the stock's normal price movements. The postevent window allows us to measure the longer term impact of the event. The postevent window can be as short as one month and as long as several years depending on the event.

Posted Date: 2/27/2013 7:34:43 AM | Location : United States

Related Discussions:- Methodology of an event study, Assignment Help, Ask Question on Methodology of an event study, Get Answer, Expert's Help, Methodology of an event study Discussions

Write discussion on Methodology of an event study
Your posts are moderated
Related Questions
S5 Corporation is evaluating an extra dividend versus a share repurchase.  In either case, the total payout to the investors will be $10,000. Current earnings are $1 per share and

how to calculate duration of a portfolio by using the average maturity, average coupon rate and average yield of maturity?

1. Motives - This section should include a detailed discussion of the main motives for the proposed acquisition supported by the latest academic literature and advances within the

develop a corporate finance project and dissices all ground of financials areas

A factoring company has offered a one-year agreement with Glub Ltd to both manage its debtors and advanced 80 per cent of the value of all its invoices immediately a sale is invoi

You are a new member of the accounting team and have been asked to examine the accounts of Bellatrix and calculate appropriate ratios in order to evaluate the company's performance

Explain about the Commission Broker All brokers sell and buy securities for earning a commission. From the investor's point of view, he is the most significant member of the

1. The managers of Merton Medical Clinic are analyzing a proposed project. The project's most likely NPV is $120,000, but, as evidenced by the following NPV distribution, there is

Question : (a) Electronic banking can be defined as "the automated delivery of new and traditional banking products and services directly to customers through electronic, int

Review of Revenue This activity will require you to access at least a portion of the federal budget as well as a state, local and an agency budget. This can be done online. Howeve