4 S.P. Kothari and J.B. Warner
3.6.2. Quantitative results 15
3.6.3. Volatility 16
3.6.4. Results 17
3.7. Cross-sectional tests 19- Long-horizon event studies 20
4.1. Background 20
4.2. Risk adjustment and expected returns 21
4.2.1. Errors in risk adjustment 22
4.2.2. Model for expected returns 22
4.3. Approaches to abnormal performance measurement 23
4.3.1. BHAR approach 23
4.3.2. Jensen-alpha approach 24
4.4. Significance tests for BHAR and Jensen-alpha measures 26
4.4.1. Skewness 27
4.4.2. Cross-correlation 27
4.4.3. The bottom line 32
References 32
Abstract
The number of published event studies exceeds 500, and the literature continues to
grow. We provide an overview of event study methods. Short-horizon methods are
quite reliable. While long-horizon methods have improved, serious limitations remain.
A challenge is to continue to refine long-horizon methods. We present new evidence
illustrating that properties of event study methods can vary by calendar time period and
can depend on event sample firm characteristics such as volatility. This reinforces the
importance of using stratified samples to examine event study statistical properties.
Keywords
event study, abnormal returns, short-horizon tests, long-horizon tests, cross-sectional
tests, risk adjustment