lecture 6 summary Flashcards
Several financial performance measures are shown below:
scales: this is measure of demand
Purchase intention: market research companies track the perception of firms and brands. it does not measure actual behaviour. Indication for how strong a brand is in the hearts and minds of consumers
stock price data: this refers to the current price that a share of stock is trading for on the market. A companys stock price reflects investor perception of its ability to earn and grow its profits in the future
Typical strategies events a manager might be interested in are as follows
new product introduction
Alliance formation
Channel restructuring
new market entry
mergers & acquisitions
Hostile takeover
Outsourcing
Conversion of non-voting shares into voting shares
introduction of an option plan for compensation
The efficient market hypothesis
is mostly used as an underlying assumption of the event study methodology. The theory tells us that stock prices immediately reflect all information that is made available to investors. If announces a layoff, this is immediately reflected by the stock market even though the event has not yet taken place. Investors consider the effect on future cash flows, and so an impact can be assessed right away.
The market may be considered as weak, semi-strong, or strong. We recognize three premises of efficient markets:
A large number of competing profit-maximizing participants analyse and value securities, each independently of the others
New information regarding securities comes to the market in a random fashion
Profit maximizing investors adjust security prices rapidly to reflect the effect of new information
Designing event studies is done through the following steps:
1) Event definition and sampling: The main element needed to conduct an event study is an announcement or an event that could influence the future cash flows of a company. The event needs to be clearly defined
2) Treatment of confounding effects: Confounding events are events that may overlap with the impact of the studied strategic event, with the effect of the focal event
3) Selection of an appropriate model: Here, we want to model the expected returns, because we would like to compare them with the realised returns to determine whether the event caused a stock market reaction. Returns themselves in a normal model estimation
The expected returns E(R) can be calculated through three methods:
the mean adjusted return model
The market model
Other models such as the Fama-french model
The cumulative abnormal returns (CAR) assumes that
each firm j and each day t exists in the event window. A and B determine a selected time window in the event window. CAR is calculated
For the expected returns, the mean adjusted model
takes the average of the returns from the estimation window and expect them to be the same in the event window. So based on the average of the past we can estimate the future
Tests for significance and their power
We want to determine whether the abnormal returns are statistically different from zero. Hence, we cna conduct a t-test and check whether the abnormal returns are significantly different from zero. We need to use statistical tests to determine whether stock market response appeared randomly or whether its occurrence is a consequence of the event itself, because it is statistically significant
Moderating analysis
we can use a moderation analysis to determine the factors that increase the positive or negative effects of an event. Here we can determine under which conditions the CARs are larger or smaller. For this, we just run a regression
Three premises for efficient markets
a large number of competing profit maximizing competitors analyze and value securities each independently from one another
new information regarding securities comes to the market in random fashion
Profit maximizing investors adjust security prices rapidly to reflect the effect of new information
