Advertisement

The advantages of using quarterly returns for long-term event studies

  • Ronald Bremer
  • Bonnie G. Buchanan
  • Philip C. EnglishII
Original Research

Abstract

The main purpose of this paper is to explore the low power and methodological problems as they continue to plague long-term event study research. We investigate long-term tests (up to 2 years) performed on non-overlapping quarterly time frames as a solution. Components of commonly employed characteristic-based matching processes are examined as the source of low power. Single “best” matching firms don’t statistically match their event firms at the time of the event and are vastly inferior to matching with portfolios. A modified market mean method which uses the securities continuously traded during the calendar event period, is shown to be well specified, have comparable power and avoid the costs of more complex matching methodologies. Contrary to popular perception, increased power derives from the decreased variance in comparison returns; not from an increased covariance between comparison firm returns and event firm returns. The tests are easy to implement, well-specified and have higher power when based on quarterly versus monthly data.

Keywords

Long-horizon performance studies Matching characteristics 

JEL Classification

C100 C150 G120 G140 

Notes

Acknowledgments

We would like to thank Stephen Brown, Kim Sawyer, Ted Moore, Jeff Netter, LeRoy Brooks, Terry Shevlin, Rob Brown, Steven Mann, participants at the 2006 Financial Management Association Meetings and 2007 Southern Finance Association Meetings for their valuable suggestions and conversations regarding this paper. Any remaining errors are our own.

References

  1. Ang JS, Zhang S (2004) An evaluation of testing procedures of long-term event studies. Rev Quant Financ Acc 23:251–274CrossRefGoogle Scholar
  2. Barber BM, Lyon JD (1996) Detecting abnormal operating performance: the empirical power and specification of test statistics. J Financ Econ 41:359–399CrossRefGoogle Scholar
  3. Barber BM, Lyon JD (1997) Detecting long-run abnormal stock returns: the empirical power and specification of test statistics. J Financ Econ 43:341–372CrossRefGoogle Scholar
  4. Brown SJ, Warner JB (1980) Measuring security performance. J Financ Econ 8:205–258CrossRefGoogle Scholar
  5. Brown SJ, Warner JB (1985) Using daily stock returns: the case of event studies. J Financ Econ 14:3–31CrossRefGoogle Scholar
  6. Byoun S (2004) Stock performance following seasoned stock-warrant unit offering. J Bus 77:75–100CrossRefGoogle Scholar
  7. Carhart MM (1997) On persistence in mutual fund performance. J Finan 52:57–82CrossRefGoogle Scholar
  8. Carpenter JN, Remmers B (2001) Executive stock option exercises and insider information. J Bus 74(4):513–534CrossRefGoogle Scholar
  9. Chen HK, Chen YS, Huang CW, Wang Y (2009) Managerial response to initial market reactions on share repurchases. Rev Pacific Basin Finan Markets Policies 12:455–474CrossRefGoogle Scholar
  10. Chou DW, Gombola M, Liu FY (2006) Earnings management and stock performance of reverse leveraged buyouts. J Finan Quant Anal 41:407–438CrossRefGoogle Scholar
  11. Chou DW, Gombola M, Liu FY (2010) Earnings management and long-run stock performance following private equity placements. Rev Quant Financ Acc 34:225–245CrossRefGoogle Scholar
  12. Clarke J, Dunbar C, Kahle K (2004) The long-run performance of secondary equity issues: a test of the windows of opportunity hypothesis. J Bus 77(3):575–603CrossRefGoogle Scholar
  13. Datta S, Iskandar-Datta M, Raman K (2001) Executive compensation and corporate acquisition decision. J Finan 56(6):2299–2336CrossRefGoogle Scholar
  14. Dichev ID, Piotroski JD (2001) The long-run stock returns following bond ratings changes. J Finan 55:173–203CrossRefGoogle Scholar
  15. Dolley J (1933) Characteristics and procedure of common stock split-ups. Harv Bus Rev 11:316–326Google Scholar
  16. Fama EF (1998) Market efficiency, long-term returns, and behavioral finance. J Financ Econ 49:283–306CrossRefGoogle Scholar
  17. Fama EF, French KR (1993) Common risk factors in the returns on stocks and bonds. J Financ Econ 33:3–56CrossRefGoogle Scholar
  18. Howe JS, Lee H (2006) The long-run stock performance of preferred stock issues. Rev Finan Econ 15:237–250CrossRefGoogle Scholar
  19. Ikenberry D, Lakonishok J, Vermaelen T (1995) The under-reaction to open market share repurchases. J Financ Econ 39:181–208CrossRefGoogle Scholar
  20. Jaffe JF (1974) Special information and insider trading. J Bus 47:411–428CrossRefGoogle Scholar
  21. Kothari SP, Warner JB (1997) Measuring long-horizon security price performance. J Financ Econ 43:301–339CrossRefGoogle Scholar
  22. Kothari SP, Warner JB (2005) Econometrics of event studies. In: Espen Eckbo B (ed) Handbook in empirical finance. North HollandGoogle Scholar
  23. Krishnan CNV, Laux PA (2005) Misreaction. J Finan Quant Anal 40:403–434CrossRefGoogle Scholar
  24. Loughran T, Ritter J (2000) Uniformly least powerful tests of market efficiency. J Financ Econ 55:361–389CrossRefGoogle Scholar
  25. Lyon JD, Barber BM, Tsai CL (1999) Improved methods for tests of long-run abnormal stock returns. J Finan 54:165–201CrossRefGoogle Scholar
  26. Mandelker G (1974) Risk and return: the case of merging firms. J Financ Econ 1:303–335CrossRefGoogle Scholar
  27. McConnell JJ, Osbilgin M, Wahal S (2001) Spin-offs, ex ante. J Bus 74:245–280CrossRefGoogle Scholar
  28. Mitchell ML, Stafford E (2000) Managerial decisions and long-term stock price performance. J Bus 73:287–329CrossRefGoogle Scholar
  29. Palmon D, Sudit EF, Yezegel A (2009) The value of columnist’s stock recommendations: an event study approach. Rev Quant Financ Acc 33:209–232CrossRefGoogle Scholar
  30. Prevost AK, Rao R (2000) Of what value are shareholder proposals sponsored by public pension funds? J Bus 73:177–204CrossRefGoogle Scholar
  31. Savickas R (2003) Event-induced volatility and test for abnormal performance. J Finan Res 26:165–178CrossRefGoogle Scholar
  32. Speiss DK, Affleck-Graves J (1999) The long-run performance of stock returns following debt offerings. J Financ Econ 54:45–73CrossRefGoogle Scholar
  33. Yang T, Lau ST (2010) An empirical investigation of Yankee stock offerings. Rev Quant Financ Acc 34:351–370CrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2010

Authors and Affiliations

  • Ronald Bremer
    • 1
  • Bonnie G. Buchanan
    • 2
  • Philip C. EnglishII
    • 3
  1. 1.Department of Information Systems and Quantitative Studies, Rawls College of BusinessTexas Tech UniversityLubbockUSA
  2. 2.Department of Finance, Albers School of BusinessSeattle UniversitySeattleUSA
  3. 3.Department of Finance and Real Estate, Kogod School of BusinessAmerican UniversityWashingtonUSA

Personalised recommendations