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More power to you: properties of a more powerful event study methodology

Author

Listed:
  • Tarcisio da Graca
  • Robert Masson

Abstract

Purpose - The purpose of this paper is to demonstrate with real data the enhanced statistical power of a GLS-based event study methodology that requires the same input data as the traditional tests. Design/methodology/approach - The paper uses full sample, subsample and simulated modified sample analyses to compare the statistical power of the GLS methodology with traditional methods. Findings - The paper finds that it is often the case that traditional tests will not reject the null when a GLS-based test may (strongly) reject the null. The power of the former is poor. Practical implications - There are many published event studies where the null is not rejected. This may be because of the phenomenon being tested but it may also be because of the lack of power of traditional estimators. Hence, rerunning them with the authors' more powerful test is likely to reject some currently well-accepted null hypotheses of no event effect, stimulating new research ideas. Moreover, as individual stocks have become more volatile, the additional power of the authors' methodology to detect abnormal performance for recent and future events becomes even more important. Originality/value - There are more than 500 event studies in the top finance journals, which can broadly be split into two subgroups: contemporaneous shocks like changes in regulation and non-contemporaneous events like mergers. GLS contemporaneous modeling of covariances in the former showed little efficiency gains. The paper's GLS modeling of variances for the latter demonstrates potentially huge effects. Practitioners should be skeptical of prior results accepting the null of no event effect and incorporate GLS to be confident of their future findings.

Suggested Citation

  • Tarcisio da Graca & Robert Masson, 2012. "More power to you: properties of a more powerful event study methodology," Review of Accounting and Finance, Emerald Group Publishing, vol. 11(2), pages 166-183, May.
  • Handle: RePEc:eme:rafpps:v:11:y:2012:i:2:p:166-183
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    References listed on IDEAS

    as
    1. Manzetti, Luigi, 1999. "Privatization South American Style," OUP Catalogue, Oxford University Press, number 9780198294665.
    2. Malatesta, Paul H., 1986. "Measuring Abnormal Performance: The Event Parameter Approach Using Joint Generalized Least Squares," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 21(01), pages 27-38, March.
    3. Gary Chamberlain, 1980. "Analysis of Covariance with Qualitative Data," Review of Economic Studies, Oxford University Press, vol. 47(1), pages 225-238.
    4. Ana Paula Serra, 2002. "Event Study Tests: A brief survey," FEP Working Papers 117, Universidade do Porto, Faculdade de Economia do Porto.
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    Citations

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    Cited by:

    1. Sharma, Abhijit & Raat, Erwin, 2016. "Acquiring control in emerging markets: Foreign acquisitions in Eastern Europe and the effect on shareholder wealth," Research in International Business and Finance, Elsevier, vol. 37(C), pages 153-169.
    2. repec:taf:applec:v:48:y:2016:i:45:p:4350-4365 is not listed on IDEAS
    3. Tarcisio da Gra?a, 2012. "Distribution of Underpricing in Privatization Auctions: Evidence from an Event Study," Review of Economics & Finance, Better Advances Press, Canada, vol. 2, pages 1-19, August.

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