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The Use of Changes in Equity Value as a Measure of the Information Content of Announcements of Changes in Financial Policy

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  • Israel, Ronen
  • Ofer, Aharon R
  • Siegel, Daniel R

Abstract

Recent work uses the change in equity value surrounding an announcement of a change in financial policy as an explanatory variable in regressions that examine whether changes in financial policy convey information about firm performance. We explore the methodological and econometric issues of this approach and show that using the change in equity value as an explanatory variable can severely bias ordinary least squares estimates. We demonstrate the effect of this bias on standard statistical tests and conclude that the bias has a significant impact on the power of these tests. We propose an estimator to partially correct the biases.

Suggested Citation

  • Israel, Ronen & Ofer, Aharon R & Siegel, Daniel R, 1990. "The Use of Changes in Equity Value as a Measure of the Information Content of Announcements of Changes in Financial Policy," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(2), pages 209-216, April.
    • Handle: RePEc:bes:jnlbes:v:8:y:1990:i:2:p:209-16
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