Handbook of Corporate Finance Empirical Corporate Finance Volume 1

Chapter 1

ECONOMETRICS OF EVENT STUDIES*

S.P. KOTHARI
Sloan School of Management, E52-325, Massachusetts Institute of Technology, 50 Memorial Drive,
Cambridge, MA 02142, USA
e-mail:[email protected]

JEROLD B. WARNER
William E. Simon Graduate School of Business Administration, University of Rochester, Rochester,
NY 14627-0107, USA
e-mail:[email protected]

Contents

Abstract 4
Keywords 4

1. Introduction and background 5


2. The event study literature: basic facts 6
   2.1. The stock and flow of event studies 6
   2.2. Changes in event study methods: the big picture 8


3. Characterizing event study methods 8
   3.1. An event study: the model 8
   3.2. Statistical and economic hypotheses 9
   3.2.1. Cross-sectional aggregation 9
   3.2.2. Time-series aggregation 10
   3.3. Sampling distributions of test statistics 10
   3.4. Criteria for “reliable” event study tests 12
   3.5. Determining specification and power 12
   3.5.1. The joint-test problem 12
   3.5.2. Brown–Warner simulation 13
   3.5.3. Analytical methods 13
   3.6. A quick summary of our knowledge 14
   3.6.1. Qualitative properties 14

*We thank Espen Eckbo, Jon Lewellen, Adam Kolasinski, and Jay Ritter for insightful comments, and Irfan
Safdar and Alan Wancier for research assistance.

Handbook of Corporate Finance, Volume 1
Edited by B. Espen Eckbo
Copyright©2007 Elsevier B.V. All rights reserved
DOI: 10.1016/S1873-1503(06)01001-4