Event studies with a contaminated estimation period |
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| Affiliation: | 1. Mays Business School, Texas A&M University, College Station, TX 77843, United States;2. Henry B. Tippie College of Business, University of Iowa, Iowa City, IA 52242, United States;3. Peter T. Paul College of Business and Economics, University of New Hampshire, Durham, NH 03824, United States;1. Chair of Financial Services, Justus Liebig University Giessen, Licher St. 74, Giessen 35394, Germany;2. European Central Bank, Sonnemannst. 20, Frankfurt 60314, Germany;1. Chair of Behavioral Finance, WHU – Otto Beisheim School of Management, Germany;2. School of Banking, University of Economics Ho Chi Minh City, Vietnam;1. ICMA Centre, Henley Business School;2. Surrey Business School;3. ALBA Graduate Business School |
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| Abstract: | Event studies are an important tool for empirical research in Finance. Since the seminal contribution of Fama et al. [Fama, E., Fisher, L., Jensen, M., Roll, R., 1969. The adjustment of stock prices to new information. International Economic Review 10, 1–21], there have been many enhancements to the classical test methodology. Somewhat surprisingly, the estimation period has attracted less interest. It is usually routinely determined as a fixed window prior to the event announcement day. In this study, we propose a test that reduces the impact of potentially unrelated events during the estimation period. Our proposition is based on a two-state version of the classical market model as a return-generating process. We present standard specification and power analyses. The results highlight the importance of explicitly controlling for unrelated events occurring during the estimation window, especially in the presence of event-induced increase in return volatility. |
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