An event study is an econometric research methodology that analyzes the impact of a past corporate event or announcement on a company’s stock prices. The study uses a standardized event horizon to analyze stock prices during the event period and determine abnormal price changes. Short-horizon event studies are considered more reliable than long-horizon studies.
An event study is a research methodology used to determine whether financial markets have a statistically significant reaction, i.e. one that has positively or negatively affected a company’s stock prices, to a past corporate event or event announcement. future. It is classified as a type of econometrics, or economic measure, that uses a combination of mathematical and statistical economics and economic theory. The underlying assumption of an event study is that the magnitude of change in performance around a specific event can provide a measure that predicts the effect on shareholder value during similar events in other companies.
The event that affects the value of a company’s stock may be within the company’s control, such as the announcement of a merger, or outside the company’s control, such as the passage of a regulatory act by the government that will a negative impact on the company’s future operations. A typical event study would analyze the stock price reaction of the same type of event, such as the issuance of a stock option, experienced by multiple companies. The actual date of the option issuance would differ between companies, but would be standardized into “time of event”, in which an event horizon would be established and stock prices during the event period would be analyzed.
The reliability of an event study has typically focused on the length of the event horizon used in the study. The common research theory in this area holds that short-horizon event studies are more reliable than long-horizon event studies where the study cannot control for the effects of labeling over longer time periods. There is an efficient market hypothesis which states that if information is going to affect a stock price at all, it will do so immediately, so the longer the study window, the less likely it is that stock price volatility could be directly attributable to the release of information.
There is a basic three-step format for an event study. First, choose an event that occurred in multiple companies and establish a time period before and after the event to serve as an event window. Next, analyze share price changes and any marketwide index changes for companies during the event window. Finally, perform a statistical analysis to determine whether any price changes are abnormally large or small compared to usual returns for such companies, and monitor for tidal effects and outside influences.
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