Suchergebnisse

AbstractThe current literature suggests various alternative procedures for increasing the power of tests to detect abnormal returns in event studies. Using randomly constructed portfolios, we simulate events and compare the results of tests using three alternative procedures: traditional, cross‐sectional, and cross‐sectional with standardized residuals. For each test, we compare results when all observations are included with results when the observations with high trading volume are omitted from the estimation period. The simulation results indicate that both the traditional approach with omitted observations and the cross‐sectional approach using standardized residuals with all observations yield approximately the correct test sizes and significantly improve the power of tests to detect abnormal returns. However, the cross‐sectional approach using standardized residuals is clearly dominant among the three procedures.

AbstractExcess returns of S&P index replacement stocks are attributed to price pressures and imperfect substitutes in previous research. However, parameter estimates are biased by the use of pre‐announcement returns; replacements are characterized by rising stock prices. Using a future estimation period to avoid this bias, we find excess returns do not reverse. Further, we find no relation between excess returns and the amount of stock closely held or the size of index funds. The evidence supports efficient market assumptions: the stock market is liquid and stocks are close substitutes.