Lecture 5 Flashcards
Financial Performance Measures
Sales - measurement of demand
Purchase intention - market research companies track the perception of firms and brands
Stock price data - Reflects investors perception of its ability to earn and grow profits in the future
Advantages of investigating stocks data
Impact of events on firm value can be investigated
Freely available
Available at the daily level, which is more rarely available for other metrics and performance
Forward looking unlike sales and profits which are all backward looking
Disadvantages of using stock data
Available only for public companies
Main focus is on investors
Causal relationship of events on stock price is difficult to identify and requires statistical know-how
Typical events used in event studies
New product introduction Alliance formation Channel restructuring New market entry Mergers and Acquisitions Hostile takeover Outsourcing Conversion of non-voting shares into voting shares Introduction of an option plan for compensation
The efficient market hypothesis
The effect of an event is incorporated instantaneously into stock prices. Thus, stock prices reflect all available information
The five steps of event studies
- Event sampling and definitions
- Treatment of confounding effects
- Selection of an appropriate model
- Tests for significance and their power
- Moderating analysis
Event definition and sampling
Determine and define the type of event
Determine the selection criteria
Search for companies that fulfil the selection criteria
Search for evetns
Treatment of confounding events
Events that overlap with the effect of the focal event
Show results for analysis with and without eliminating confounded events
Selection of an appropriate model
Determine the event window and search for abnormal returns over this window
Define the first date when the information reached the market
Infer the normal performance of the stock
Mean Adjusted Return Model
Calculate the mean returns of a firm over the estimation period. Does not consider market movements and no additional data is needed
The Market Model
Most popular methods.
Calculates returns of the stock market with returns of a broad market index like the SP500
Tests for significance and their power
T-tests Standardized residual tests Corrado rank test Generalized sign test Skewness adjusted t-test
