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PERFORMING AN EVENT STUDYAN EXERCISE FOR FINANCE STUDENTS
William A. Reese, Jr.Russell P. Robins
A. B. Freeman School of BusinessTulane UniversityFEA ConferenceSept. 25, 2015
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WE TEACH OUR STUDENTS: When there is an announcement of a
corporate acquisition, the price of the firm being acquired usually goes up. The price of the firm making the
acquisition usually goes down When an analyst upgrades a stock, it
usually goes up in price Initial Public Offerings (IPOs) of
common stock are usually underpriced.
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WE TEACH OUR STUDENTS: It is difficult to make money based on some
surprising economic data a day or two after the data has been released.
Historically, on average, small-cap stocks do well in the month of January.
There are various types of momentum in stock returns (weekly, monthly, longer)
Investors tend to put more money into mutual funds that have recently performed well.
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EVENT STUDIES
Each of these facts have been found by researchers through Event Studies
Plotting Cumulative Abnormal Returns (CARs) make Event Studies easy to explain and understand
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M & A ANNOUNCEMENTS
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REACTION TO CNBC REPORTS
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NAME CHANGE
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CLASSROOM EVENT STUDIES We teach the facts We show the graphs We don’t teach the methodology
It can be complex We don’t have students do their own
Event Studies What to do? Time consuming
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OUR EVENT STUDY
Investments Course Undergrad or MBA Easy to Perform Easy to Understand Predictable Results
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OUR EVENT STUDY
Are there abnormal returns when a stock is added to the S&P 500?
Is there abnormal trading volume?
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SHOULD WE EXPECT ANYTHING?
Since October 1989, S&P has been announcing (when possible) changes to the index one week prior to the effective date
Index funds MUST buy the stock May create upward price pressure
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OUR DATA
Every stock that was added to the S&P 500 between January 2000 and July 2015. Purged to leave 270 stocks that are still listed on Yahoo! Finance
Date of addition Ticker symbol
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OUR SPREADSHEET
Macro that obtains data from Yahoo! Finance for stocks the student selects and S&P 500
42 days before the listing date 10 days after the listing date
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OUR SPREADSHEET
Event window is day -10 to day +10
Returns for stock and S&P are calculated for 30 days prior to event window “Calculation Period”
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THE MARKET MODEL A regression estimates alpha and beta
for each stock during calculation period:
Ri= α + β(RMkt) + e. These estimates are used to calculate
risk-adjusted expected returns during the event window:
E(R)= α + β(RMkt)
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THE MARKET MODEL Abnormal returns are calculated: Abn. Ri = Ri - E(Ri)
Cumulative Abnormal Returns (CARs) are the sum of all abnormal returns up to time t in the event window
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THE MARKET MODEL Cumulative Abnormal (Scaled) Volume
is also calculated for the event window Average volume during calculation period
is established as “normal” volume
CARs and CAVs are averaged across stocks in the sample and T-stats are calculated.
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TYPICAL RESULTS
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TYPICAL RESULTS
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WHAT THE STUDENTS DO Select a random set of stocks from our list Enter their ticker symbols into spreadsheet Click “Download” Wait a couple of minutes
Depending on internet speed and number of stocks selected
Observe and analyze the results Answer prepared questions Come up with their own idea for an event
study
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THE STUDENTS WILL LEARN: How an event study is done How to calculate risk-adjusted returns
using the market model How to calculate and plot CARs Reinforcement of averages, standard
errors, t-stats, and statistical significance
How buying pressure can affect returns and volume
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LOCATION OF SPREADSHEET The Spreadsheet and basic instructions
can be found at http://info.freeman.tulane.edu/breeseemba/eventstudy.htm