Event Quiz

Question 1

Define event studies

Answer 1

Event studies is a methodology that examines stock price movements around events

Question 2

Events can be divided into 3 categories

Answer 2

Announcements generated by the firm: launch of new product

Announcements made by other entities such as regulatory bodies or media: release of customer satisfaction scores

Announcements made by the competitors:
Entry of a large competitor

Question 3

Explain the efficient market hypothesis

Answer 3

The efficient market hypothesis suggests that investors use new info contained in an announcement of an event to instantly adjust their expectations of the focal firms future cash flows. As a result the price of the firms stock may change to account for these new expectations

Question 4

Define confounding events

Answer 4

Confounding events are events that may overlap the effect of the focal event. If the measurement window for the abnormal returns includes both events, the overall change in stock returns may be caused by both events

Question 5

An example of a confounding event

Answer 5

A firm may announce the introduction of a new product a day after they announces that they will not meet their earning estimates

Question 6

What is the best treatments for the occurring of confounding events in event studies?

Answer 6

Show results for Analysis with and without eliminating confounded events.

Note that eliminating confounded observations may be unnecessary for short term event studies if sample size is large enough

Question 7

What are three ads of investigating stock price data

Answer 7

Free available (free access, eg yahoofinnace)

Data is available at the daily level, which is more rarely available at the firm level for other metrics and performances

Forward looking unlike sales and profits which are all backward looking

Added value of firm actions can be tracked

Question 8

What are three dis of investigating stock price data

Answer 8

Stock price data is only available for traded companies. This could result in sampling bias

Main focus is on investors. Other interest groups are only considered indirectly

A causal relationship of events on stock price is difficult to identify and requires statistical know how

Does not indicate actual purchase behaviour of consumers (eg sales)A

Question 9

5 steps of an event study

Answer 9

1. Event definiton and sampling
2. Treatment of confounding effects
3. selection of an appropriate model
4. Testa for significance and their power
5. Moderating Analysis