Event study
Encyclopedia
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. Event studies have been used in a large variety of studies, including mergers and acquisitions, earnings announcements, debt
or equity
issues, corporate reorganisations, investment decisions and corporate social responsibility
(MacKinlay 1997; McWilliams & Siegel, 1997).
Warren-Boulton and Dalkir use an event-probability methodology originally developed by McGuckin et al. (1992) to be applied to merger analysis. Their specific methodology involves ex-ante calculation of the financial markets' assessment of the probability that the merger will indeed take place in the future.
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) (S.P. Kothari and Jerold Warner) were able to refine long-horizon methodologies in order to improve the design and reliability of the studies over longer periods.
and Office Depot
(1996), which was challenged by the Federal Trade Commission
and eventually withdrawn.
regression
. In addition, they also look at the effect of the merger in specific event windows.
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
or equity
Stock
The capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
issues, corporate reorganisations, investment decisions and corporate social responsibility
Corporate social responsibility
Corporate social responsibility is a form of corporate self-regulation integrated into a business model...
(MacKinlay 1997; McWilliams & Siegel, 1997).
Motivation
The logic behind the event study methodology (within the specific context of mergers) is explained in Warren-Boulton and Dalkir (2001):- Investors in financial markets bet their dollars on whether a merger will raise or lower prices. A merger that raises market prices will benefit both the merging parties and their rivals and thus raise the prices for all their shares. Conversely, the financial community may expect the efficiencies from the merger to be sufficiently large to drive down prices. In this case, the share values of the merging firms’ rivals fall as the probability of the merger goes up. Thus, evidence from financial markets can be used to predict market price effects when significant merger-related events have taken place.
Methodologies
The general event study methodology is explained in, for example, MacKinlay (1997) or Mitchell and Netter (1994).Warren-Boulton and Dalkir use an event-probability methodology originally developed by McGuckin et al. (1992) to be applied to merger analysis. Their specific methodology involves ex-ante calculation of the financial markets' assessment of the probability that the merger will indeed take place in the future.
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
Kothari
Kothari may refer to:In religion:* Kothari , in the Swaminarayan Hindu Faith* a Jat clanAs a surname:* Brij Kothari - a social entrepreneur* Daulat Singh Kothari* Jehangir Kothari* Komal Kothari* Meghna Kothari* Nisha Kothari...
and Warner
Warner
- Surname :* Albert Warner , one of the founders of Warner Bros. Studios* Amelia Warner , British actress* Amy Warner , soccer player who graduated from the University of Notre Dame...
(2005) (S.P. Kothari and Jerold Warner) were able to refine long-horizon methodologies in order to improve the design and reliability of the studies over longer periods.
Application to merger analysis
Warren-Boulton and Dalkir (2001) apply their event-probability methodology to the proposed merger between Staples, Inc.Staples, Inc.
Staples Inc. is a large office supply chain store, with over 2,000 stores worldwide in 26 countries. Based in Framingham, Massachusetts, United States, the company has retail stores, serving customers under its original name in Austria, Brazil, China, France, Germany, India, Italy, Norway,...
and Office Depot
Office Depot
Office Depot is a supplier of office products and provides many services. The company's selection of brand name office supplies includes business machines, computers, computer software and office furniture, while its business services encompass copying, printing, document reproduction, shipping,...
(1996), which was challenged by the Federal Trade Commission
Federal Trade Commission
The Federal Trade Commission is an independent agency of the United States government, established in 1914 by the Federal Trade Commission Act...
and eventually withdrawn.
Empirical methods
Warren-Boulton and Dalkir (2001) run a time-seriesTime series
In statistics, signal processing, econometrics and mathematical finance, a time series is a sequence of data points, measured typically at successive times spaced at uniform time intervals. Examples of time series are the daily closing value of the Dow Jones index or the annual flow volume of the...
regression
Regression analysis
In statistics, regression analysis includes many techniques for modeling and analyzing several variables, when the focus is on the relationship between a dependent variable and one or more independent variables...
. In addition, they also look at the effect of the merger in specific event windows.
Findings
Warren-Boulton and Dalkir (2001) find highly significant returns to the only rival firm in the relevant market. Based on these returns, they are able to estimate the price effect of the merger in the product market which is highly consistent with the estimates of the likely price increase from other independent sources.See also
- Post earnings announcement driftPost earnings announcement driftIn Financial Economics post–earnings-announcement drift, or PEAD is the tendency for a stock’s cumulative abnormal returns to drift in the direction of an earnings surprise for several weeks following an earnings announcement.Once a firm's current earnings become known, the information content...
, an anomaly found in event studies of earnings announcements
- CRSPCenter for Research in Securities PricesThe Center for Research in Security Prices is a provider of historical stock market data. The Center is a part of the Booth School of Business at the University of Chicago. CRSP maintains some of the largest and most comprehensive proprietary historical databases in stock market research...
, database commonly used in event studies