An event study is a research method that uses econometrics to determine if financial markets have reacted positively or negatively to a past or future corporate event. The reliability of the study depends on the length of the event horizon used. A basic three-step format is used to analyze stock price changes and market index changes.
An event study is a research methodology used to determine whether financial markets have a statistically relevant reaction – that is, positively or negatively affected a company’s stock prices – to a past corporate event or an announcement of an event. future. It is classified as a type of econometrics, or economic measurement, which 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 surrounding a specified event can provide a measure that can predict the effect on shareholder value during similar events at 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 approval of a regulatory act by the government that will have a negative impact on the company’s future. company operations. A typical event study would analyze the stock price reaction to the same type of event, such as the issuance of a stock option, experienced by various companies. The actual option issuance date would differ between companies, but would be standardized to “event time”, where an event horizon would be established and stock prices during the event time window would be analyzed.
The reliability of an event study typically depends on the length of the event horizon used in the study. 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 market-wide effects over longer periods. There is an efficient market hypothesis which says that if information will affect the stock price, it will do so immediately; therefore, the longer the study window, the less likely it is that volatility in stock prices can be directly attributed to information disclosure.
There is a basic three-step format for an event study. First, choose an event that occurred at multiple companies and establish a time period before and after the event to serve as the event window. Then, analyze stock price changes and any changes in the market index for companies during the event window. Finally, do a statistical analysis on whether any changes in price are unusually large or small compared to the usual returns for these companies and control for market effects and outside influences.
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