Event study

An event study is a statistical method to assess the impact of an event on the value of a firm. For example, the announcement of a merger between two business entities can be analyzed to see whether investors believe the merger will create or destroy value. The basic idea is to find the abnormal return attributable to the event being studied by adjusting for the return that stems from the price fluctuation of the market as a whole. The event study was invented by Fama, Fisher, Jensen, and Roll (1969). An event study is a statistical method to assess the impact of an event on the value of a firm. For example, the announcement of a merger between two business entities can be analyzed to see whether investors believe the merger will create or destroy value. The basic idea is to find the abnormal return attributable to the event being studied by adjusting for the return that stems from the price fluctuation of the market as a whole. The event study was invented by Fama, Fisher, Jensen, and Roll (1969). As the event methodology can be used to elicit the effects of any type of event on the direction and magnitude of stock price changes, it is very versatile. Event studies are thus common to various research areas, such as accounting and finance, management, economics, marketing, information technology, law, political science, operations and supply chain management. One aspect often used to structure the overall body of event studies is the breadth of the studied event types. On the one hand, there is research investigating the stock market responses to economy-wide events (i.e., market shocks, such as regulatory changes, or catastrophic events). On the other hand, event studies are used to investigate the stock market responses to corporate events, such as mergers and acquisitions, earnings announcements, debt or equity issues, corporate reorganisations, investment decisions and corporate social responsibility (MacKinlay 1997; McWilliams & Siegel, 1997). The general event study methodology is explained in, for example, MacKinlay (1997) or Mitchell and Netter (1994). In MacKinlay (1997), this is done 'using financial market data' to 'measure the impact of a specific event on the value of a firm'. He argues that 'given rationality in the marketplace, the effects of an event will be reflected immediately in security prices. Thus a measure of the event's economic impact can be constructed using security prices observed over a relatively short time period'. It is important to note that short-horizon event studies are more reliable than long-horizon event studies as the latter have many limitations. However, Kothari and Warner (2005) were able to refine long-horizon methodologies in order to improve the design and reliability of the studies over longer periods.