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Characteristic-Based Benchmark Returns and Corporate Events

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  • Hendrik Bessembinder
  • Michael J Cooper
  • Feng Zhang

Abstract

We propose that fitted values from market-wide regressions of firm returns on lagged firm characteristics provide useful benchmarks for assessing whether average returns to certain stocks are abnormal. To illustrate, we study eight documented events with abnormal returns, including credit rating and analyst recommendation downgrades, initial and seasoned public equity offerings, mergers and acquisitions, dividend initiations, share repurchases, and stock splits. We show that the apparently abnormal returns in the months after these events are substantially reduced or eliminated when compared to characteristic-based benchmarks. Characteristic-based benchmarks perform better in explaining post-event returns than do recent four- and five-factor models. Received September 19, 2016; editorial decision February 16, 2018 by Editor Andrew Karolyi. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web Site next to the link to the final published paper online.

Suggested Citation

  • Hendrik Bessembinder & Michael J Cooper & Feng Zhang, 2019. "Characteristic-Based Benchmark Returns and Corporate Events," Review of Financial Studies, Society for Financial Studies, vol. 32(1), pages 75-125.
  • Handle: RePEc:oup:rfinst:v:32:y:2019:i:1:p:75-125.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhy037
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    Cited by:

    1. Borup, Daniel, 2019. "Asset pricing model uncertainty," Journal of Empirical Finance, Elsevier, vol. 54(C), pages 166-189.

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