Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test Statistics

This research evaluates methods used in event studies that employ accounting-based measures of operating performance. We examine the choice of an accounting-based performance measure, a statistical test, and a model of expected operating performance. We document the impact of these choices on the test statistics designed to detect abnormal operating performance. We find that commonly used research designs yield test statistics that are misspecified in cases where sample firms have performed either unusually well or poorly. In this sampling situation, the test statistics are only well specified when sample firms are matched to control firms of similar pre-event performance.