EVENT STUDY METHODS AND EVIDENCE ON THEIR PERFORMANCE

Abstract. The paper outlines widely used methods of estimating abnormal returns and testing their significance, highlights respects in which they differ conceptually, and reviews research comparing results they produce in various empirical contexts. Direct evidence on the performance of different methods is available from simulation experiments in which known levels of abnormal return are added. The market model is most commonly used to generate expected returns and no better alternative has yet been found despite the weak relationship between beta and actual returns. Choice of procedure for significance testing depends on the characteristics of the data. The evidence indicates that in many cases the best procedure is to standardise market model abnormal returns by their time series standard errors of regression and use the t -test. Alternatively a rank test appears to be at least as powerful. If errors are cross-correlated or increase in variance during the test period, other methods discussed should be used.     

Corporate disclosure, cost of capital and reputation: Evidence from finance directors

The majority view of the executives interviewed is that disclosure reduces the cost of equity up to the point at which a good-practice level of communication has been reached, after which there is little further effect. Greater disclosure to rating agencies and lenders reduces the cost of debt. Attitudes towards more mandatory disclosure are mostly negative. The main perceived cost of disclosure is creating the information. The main benefits are promotion of a reputation for openness and of shareholder confidence, not a lower cost of capital. We suggest that a reputation for openness is valued because it enhances the company's overall reputation, which brings commercial benefits.     

The Cost of Diversity: Endogenous Property Rights and Growth

Well-specified property rightsenhance economic performance but vary considerably across countries.The failure of numerous nation-states to adopt growth-enhancinginstitutions is paradoxical. This paper examines the role ofethnic and linguistic diversity in retarding the developmentof growth-enhancing property rights and in-turn economic growth.The data show that property rights are attenuated in more diversepolities and economic growth is correspondingly lower.     

Evaluating Permanent Disability Ratings Using Empirical Data on Earnings Losses

Workers' compensation systems are typically designed to assign higher permanent disability benefits to workers with more severe disabilities. However, little or no scientific work exists to guide the design of ratings systems to properly account for the amount of earnings power lost due to disability. In this article, we examine the effectiveness of disability ratings using matched administrative data on ratings and earnings for a large, representative sample of permanent disability claimants in California. We find that while workers with higher ratings do experience larger earnings losses on average, there are large and persistent differences in average earnings losses for similarly rated impairments in different parts of the body. We then explore how adjusting permanent disability ratings to reflect cross-impairment differences in earnings losses can affect the equity of permanent disability benefits. Adjusting disability ratings to account for typical earnings losses reduces cross-impairment differences substantially. The adjusted ratings result in a more equitable distribution of disability benefits across workers with different impairments.     

Optimal annuitization with imperfect information about insolvency risk

Even the highest‐rated life‐annuity providers have a nonzero probability of becoming insolvent during an annuitant's retirement, and many potential annuitants are unaware of the state guaranty associations (SGAs) which provide insurance against the associated financial consequences. We study the theoretical implications of insolvency risk—real and perceived—for annuitization. Then, using a disciplined calibration of annuitant misperceptions in a standard life cycle model, we show that even the modest perceived risk of default associated with highly‐rated providers can—absent awareness of the SGAs—reduce annuitization and significantly reduce welfare. We further consider the implications of information frictions which prevent retirees from discerning true insolvency risk and we find that these frictions have plausibly large additional quantitative implications for annuitization and welfare. Simulations of our model further suggest that the general lack of awareness of the SGA backstop by potential annuitants can erode a sizable fraction of the potential welfare benefits thereof.     

The evolving relation between dividends and flexible payouts: A different evolution

We study payout by UK listed companies during 1993–2018. Regular dividends remain the dominant channel, but flexible payouts (special dividends and repurchases) have grown, and they make total payout more responsive to earnings. Flexible payouts are used to augment regular dividends: few companies pay out by flexible means only, and tests indicate that they augment rather than replace regular dividends. Comparison with US evidence shows that UK companies make greater use of dividends (including specials) in relation to repurchases, and have a greater willingness to change regular dividend per share.     

Perceived Product Sizes in Visually Complex Environments

Although prior scholarship has demonstrated important effects of visual complexity on product perceptions, the relationship between the visual complexity of a product’s environment and that product’s perceived size remains unexplored. Because size is such an important product characteristic in many consumer contexts, the lack of exploration of this relationship leaves a significant gap in the literature on size perceptions, especially in relation to the retailing domain. The present investigation seeks to document the relationship between environmental visual complexity and the perceived size of a product. Namely, five studies show that high visual complexity decreases consumer size perceptions of a focal product through a serial mediation process in which high complexity pulls consumer attention away from the focal product. This shifted attention decreases processing fluency and leads consumers to perceptually minimize size to avoid information overload in the processing of a display. Even after ruling out potential influences of referent information (study 5) and alternative explanations of affective processing and perceived depth (study 4), these effects hold. The findings have implications for both theory and practice, shedding light on the relationship between size perceptions of a focal object and its environment.