Capturing long and short run performance

Question 1

What is shor-run event studies ?

Answer 1

Short-run performance examines how the market reacts to an MA announcement over a brief event window

(-2, +2 days)

Question 2

What is event studies analysis

Answer 2

Evaluates the markets efficiency in pricing the MAs potential impact

Question 3

What steps are involved in a short run event study analysis

Answer 3

1 - define your event window
2 - estimate expected returns using models such as: Market model and market adjusted model
3 - Compute cumulative abnormal returns CARs

Question 4

Advantages

Answer 4

• Quickly identifies whether the MA creates or destroys shareholder value
• Reflects market efficiency in incorporating new information

Question 5

Litrature

Answer 5

Fama et al (69) - Introduced event study methodologies, demonstrating how stock prices adjust to new information

Brown and Warner (85) - Highlighted the robustness of event studies, focusing on the use of CARs in short windows to minimize confounding effects

Fuller et al (02) - Emphasized the importance of accurate benchmarks for expected returns

Question 6

What are some applications of short run analysis

Answer 6

• Assess the type of synergy anticipated by the market
• To compare reactions across different payment methods (cash or stock)

Question 7

capturing Long-run performance

Answer 7

Long-run performance analyzes the sustainability of MA benefits, often 1-5 years

Question 8

What are the 2 methodologies used in LRPA

Answer 8

1. Buy and hold abnormal returns
2. Calendar-time portfolio regression

Question 9

What is buy and hold abnormal returns

Answer 9

• They measure the cumulative performance of the MA over a specified period of time

Question 10

What are some advantages of using BHARs as a way to capture long-run performance

Answer 10

Intuitive measure - Reflects the actual investor experience by showing cumulative returns over time

Benchmarking - Allows for comparisons against various benchmarks, such as industry indices or peer groups

Question 11

What are some disadvantages of using BHARs as a way to capture long-run performance

Answer 11

Statistical issues - BHARs are often right skewed meaning that positive returns can grow indefinitely, while losses are capped at 100%

Event overlap - In studies involving multiple events, BHARs may overstate or understate cumulative effects due to event overlap

Question 12

What is some literature behind BHARs

Answer 12

Barber and Lyon (1997) - discussed the use of BHARs in detecting long-run abnormal returns, noting statistical challenges like skewness

Lyon et al (1999) - Improved stat tests for long-run BHARs proposing methods to address non-normal return distributions

Question 13

What is calendar-time portfolio regressions

Answer 13

Portfolio of MA firms and regress their returns on market factors

Question 14

What are some advantages on CTPRs

Answer 14

Robust statistical framework - Based on regression models, CTPR provides more reliable estimates of long run abnormal returns

Accounts for overlap - Handles overlapping MA events more effectively that BHARs by aggregating them into portfolios

Question 15

What are some disadvantages of CTPRs

Answer 15

Complexity - Requires advanced econometric knowledge and more computer effort

Equal weighting of time periods - Weighs each calendar period equally, which may under represent the significance of periods with many events

Question 16

Literature of CTPRs

Answer 16

Healy et al (1992) - Found significant improvements in post merger operating cash flows relative to industry peers

Andrade et al (2001) Highlighted long-term operating performance changes after MAs

Question 17

Literature comparing long and short run analysis

Answer 17

Fama (1998) - Suggested that while short rin studies indicate market efficiency, long run studies often face challenges from confounding factors and methodological bias

Loughran and Vijh (1997) - Demonstrated contrasting results for short-run and long-run MA performance, particularly highlighting the poor long-term performance of stock financed deals