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On the use of event studies to evaluate economic policy decisions: A note of caution

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  • Haji Ali Beigi, Maryam
  • Budzinski, Oliver

Abstract

Event studies represent an increasingly popular method to evaluate (future) welfare effects of economic policy decisions. The basic idea is to hire the stock market as a referee, i.e. that stock market reactions to the announcement of policy decision are interpreted to contain superior information about the (future) welfare effects of these decisions. This paper investigates the degree of reliability of event studies as a policy programs evaluation method by critically reflecting upon two underlying assumptions. Since both the information superiority and efficiency of financial markets and, in particular, the conclusion from abnormal returns to (future) economic welfare effects consist of considerable interpretation problems, we issue a note of caution: scientists and policymakers should be very reluctant to rely on stock market reactions as a referee on economic policy decisions. Event studies cannot replace thorough theory-driven economic analysis. --

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Bibliographic Info

Paper provided by Ilmenau University of Technology, Institute of Economics in its series Ilmenau Economics Discussion Papers with number 80.

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Date of creation: 2012
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Handle: RePEc:zbw:tuiedp:80

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Related research

Keywords: event studies; abnormal returns; economic policy evaluation; regional free trade agreements; merger control decisions; IMF supported programs;

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References

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  1. Kara M. Reynolds, 2006. "Anticipated versus Realized Benefits: Can Event Studies be Used to Predict the Impact of New Regulations?," Working Papers, American University, Department of Economics 2006-02, American University, Department of Economics.
  2. Moser, Christoph & Rose, Andrew K, 2011. "Who Benefits from Regional Trade Agreements? The View from the Stock Market," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8566, C.E.P.R. Discussion Papers.
  3. Duso, Tomaso & Gugler, Klaus & Yurtoglu, Burcin B., 2006. "How Effective is European Merger Control?," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 153, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.
  4. Michael Cichello & Douglas Lamdin, 2006. "Event Studies and the Analysis of Antitrust," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(2), pages 229-245.
  5. Budzinski, Oliver, 2012. "Empirische Ex-Post Evaluation von wettbewerbspolitischen Entscheidungen: Methodische Anmerkungen," Ilmenau Economics Discussion Papers 69, Ilmenau University of Technology, Institute of Economics.
  6. Shleifer, Andrei & Summers, Lawrence H, 1990. "The Noise Trader Approach to Finance," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 4(2), pages 19-33, Spring.
  7. Damien Neven & Hans Zenger, 2008. "Ex Post Evaluation of Enforcement: A Principal-Agent Perspective," De Economist, Springer, Springer, vol. 156(4), pages 477-490, December.
  8. Charles J. Corrado, 2011. "Event studies: A methodology review," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, Accounting and Finance Association of Australia and New Zealand, vol. 51(1), pages 207-234, 03.
  9. Oliver Budzinski, 2011. "Impact Evaluation of Merger Decisions," Working Papers, University of Southern Denmark, Department of Environmental and Business Economics 112/11, University of Southern Denmark, Department of Environmental and Business Economics.
  10. Robert J. Shiller, 2002. "From Efficient Market Theory to Behavioral Finance," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1385, Cowles Foundation for Research in Economics, Yale University.
  11. Hopkins, Yvette S. & Connor, John M., 1992. "A Re-Examination Of Event Studies Applied To Challenged Horizontal Mergers," Working Papers, Regional Research Project NE-165 Private Strategies, Public Policies, and Food System Performance 116105, Regional Research Project NE-165 Private Strategies, Public Policies, and Food System Performance.
  12. Kutan, Ali M. & Muradoglu, Gulnur & Sudjana, Brasukra G., 2012. "IMF programs, financial and real sector performance, and the Asian crisis," Journal of Banking & Finance, Elsevier, Elsevier, vol. 36(1), pages 164-182.
  13. Dnes, Antony W, et al, 1998. "The Regulation of the United Kingdom Electricity Industry: An Event Study of Price-Capping Measures," Journal of Regulatory Economics, Springer, Springer, vol. 13(3), pages 207-25, May.
  14. Budzinski, Oliver, 2012. "Impact evaluation of merger control decisions," Ilmenau Economics Discussion Papers 75, Ilmenau University of Technology, Institute of Economics.
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Cited by:
  1. Budzinski, Oliver, 2012. "Impact evaluation of merger control decisions," Ilmenau Economics Discussion Papers 75, Ilmenau University of Technology, Institute of Economics.

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