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Event studies and the measurement of abnormal returns

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The events that can impact capital market include declaration of dividends or earnings, splits of stock, mergers of two or more companies, listings of new companies in exchanges, initial public offerings (IPO) and changes of people at key management positions. The impact of such events can be underreaction, overreaction, abnormal returns and reversals. There are many types of event studies in the literature such as examination of Return Variances by Beaver (1968), and Patell (1976), studies on volume of stock trading by Beaver (1968) and Campbell and Wasley (1996), analyzes of operating performance by Barber and Lyon (1996) and management of earnings through discretionary accruals by Dechow, Cloan, and Sweeney (1995) and Kothari, Leone, and Wasley (2005).

However our paper is focused only the mean stock prices. The researches during past thirty years have not changed the basic statistical format and it still concentrate around the measurement of mean and cumulative mean of abnormal return before and after the event. The only major changes that took place are the periods of the data for which mean is calculated. Earlier data of returns were used on monthly basis but today data are used on daily and intraday basis.

This helps in measuring the abnormal returns more accurately and determines its effects more descriptively. The second change which has come in the event studies is in the ways of estimating the abnormal returns for events that are long-horizon. The new development of French 3 factor model in pricing asset by Fama also brought some changes in event studies methodology. In spite of these changes, there are serious limitations in the methods of long-horizon and extreme caution is required while making any inferences from it.

(Kothari and Warner, 1997, p. The model of event study constitute examination of behaviour of the stock price and return on it around occurrence of any common type of event such as ex-dividend announcement, or stock split, etc. The event can take place on any date of the calendar year. This is represented mathematically as follows: - Corrado (2011)Where the normal return from stock trading or the expected return is represent by Kit and the abnormal return or the return which is not expected is represented by eit.

By decomposition of above equation we find that the abnormal return is the difference between return

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