How Eventful are Event Studies?

42 Pages Posted: 19 Feb 2001

See all articles by Kim R. Sawyer

Kim R. Sawyer

University of Melbourne - School of Historical and Philosophical Studies

André Gygax

University of Melbourne - Department of Finance

Date Written: February 19, 2001

Abstract

This paper reexamines the event study methodology in finance. We consider a formal specification of an event study in terms of a system of abnormal returns and, in particular, emphasise the possible limitations of using a methodology when misspecification may be present. In the first section of the paper, the theory of the event study is reviewed, with reference to the definition problems associated with the measurement of abnormal returns, the conditional information set embedded in return expectations, the determination of the event window, and the similarity across events. A major insight of our paper is to emphasise the importance of conditionality, learning and convergence in the theory of event studies and in the evolution of abnormal returns. In one section of the paper, we look at the question of recursive residuals, residuals formed when the information set is updated period by period, and implicitly question why they have not been used in event studies. In another section, the focus is on the specification of learning models, both across events and within the event period. Furthermore, we provide some conjectures about how to measure the information in events. Finally, we bring together the issues into a coherent methodology.

Keywords: Event studies, learning, recursive residuals

JEL Classification: G14, C40

Suggested Citation

Sawyer, Kim Russell and Gygax, André, How Eventful are Event Studies? (February 19, 2001). Available at SSRN: https://ssrn.com/abstract=260697 or http://dx.doi.org/10.2139/ssrn.260697

Kim Russell Sawyer (Contact Author)

University of Melbourne - School of Historical and Philosophical Studies ( email )

Melbourne
Australia

André Gygax

University of Melbourne - Department of Finance ( email )

Faculty of Business and Economics
Parkville, Victoria 3010
Australia

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,809
Abstract Views
5,691
rank
11,202
PlumX Metrics