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Misspecification in event studies

Author

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  • Marks, Joseph M.
  • Musumeci, Jim

Abstract

We examine the statistical error and efficiency associated with two commonly used event-study techniques when applied to samples of various sizes. Previous research has established that the frequently used Patell (1976) test is not well specified when the event itself creates additional return variance. We find that even under ideal conditions when the event creates no additional variance, the Patell test rejects a true null hypothesis substantially more often than the stated significance level. In contrast, the alternate test of Boehmer et al. (1991) performs well in samples of all sizes and under all conditions we consider.

Suggested Citation

  • Marks, Joseph M. & Musumeci, Jim, 2017. "Misspecification in event studies," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 333-341.
    • Handle: RePEc:eee:corfin:v:45:y:2017:i:c:p:333-341
    DOI: 10.1016/j.jcorpfin.2017.05.003
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    References listed on IDEAS

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    Cited by:

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    2. Malik, Ihtisham A. & Chowdhury, Hasibul & Alam, Md Samsul, 2023. "Equity market response to natural disasters: Does firm's corporate social responsibility make difference?," Global Finance Journal, Elsevier, vol. 55(C).
    3. Onur Enginar & Kazim Baris Atici, 2022. "Optimal forecast error as an unbiased estimator of abnormal return: A proposition," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 41(1), pages 158-166, January.
    4. Arnab Bhattacharjee & Sudipto Roy, 2019. "Abnormal Returns or Mismeasured Risk? Network Effects and Risk Spillover in Stock Returns," JRFM, MDPI, vol. 12(2), pages 1-13, March.
    5. Elsas, Ralf & Schoch, Daniela Stephanie, 2023. "Robust inference in single firm/single event analyses," Journal of Corporate Finance, Elsevier, vol. 80(C).
    6. Amavi S. S. Agbodji & Emmanuelle Nys & Alain Sauviat, 2021. "Do CDS Maturities Matter in the Evaluation of the Information Content of Regulatory Banking Stress Tests? Evidence from European and US Stress Tests," Revue économique, Presses de Sciences-Po, vol. 72(1), pages 65-102.
    7. Ihtisham A. Malik & Robert W. Faff & Kam F. Chan, 2020. "Market response of US equities to domestic natural disasters: industry‐based evidence," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3875-3904, December.

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    More about this item

    Keywords

    Event study; Standardized abnormal return; Misspecification; Simulation; Patell test; BMP test;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • C10 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - General
    • C15 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Statistical Simulation Methods: General

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