1 / 38

Event studies Irene Karamanou, Ph.D

Event studies Irene Karamanou, Ph.D. Two types of event studiesEvent dates are contemporaneous

lotta
Download Presentation

Event studies Irene Karamanou, Ph.D

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

    1. Event studies Irene Karamanou, Ph.D Event studies: Measuring the market reaction to an event. Explaining the cross-sectional variation in market reaction Why event studies? Easy to identify Standard methodology Strong motivations

    2. Event studies Irene Karamanou, Ph.D Two types of event studies Event dates are contemporaneous – e.g., Regulation effects (policy implications) Event dates differ cross-sectionally – e.g., Earnings announcements, restatement announcements, changes in analyst recommendations, voluntary adoptions

    3. Event studies Contemporaneous events – H1 Why would the market move in response to a new regulation? Benefits vs. costs H1a: Positive (negative) market reaction on the events that increase (decrease) the probability of adoption H1b: Positive overall market reaction to the events that led to the adoption of the law Easy to test Issue of measuring the abnormal return Event windows Note: Measuring expectations of the effect

    4. Contemporaneous events- H1 Armstrong, Barth, Jagolinzer, Riedl 2007

    5. Event studies Contemporaneous events – H1 Expect a positive Overall market reaction to all events that increased the probability of adoption Event window used: 3 days Method: Value weighted market-adjusted returns CARi, t= Rp – Rm where i = event , t = -1, 0, +1 Portfolio returns based on market value Market = DJ Global Index Results: 16 event CAR is positive and significant “Investors expect net benefits to IFRS adoption in Europe” Question: Foreign vs. local investor reaction?

    6. Event studies Contemporaneous events –H1 Li, Pincus and Rego, 2006 Market reaction to SOX and earnings management Benefits: Investor Protection by improving the quality, accuracy and reliability of corporate disclosures Costs of implementation: Marosi and Massoud – foreign firms exiting US, US firmsderegistering from SEC Piotroski and Srinivasan – foreign listings moving to LSE

    7. Event studies Contemporaneous events – H1 Li, Pincus and Rego, 2006 Eight events relating to SOX passage H1: “Note that because the Act affects all publicly traded firms, we cannot control for market-wide stock price effects in computing stock returns, doing so could control for the SOX-related effects we seek to estimate. However, this means that contemporaneous market-level events unrelated to SOX could confound our analysis” (p.7) Market Return= a + SßiD + e N=252 (2002 returns) All event average and important specific events are significant in the right direction

    8. Event studies Contemporaneous events- H1 Regulations do not have to affect all firms Overall effect easier to document Schipper and Thompson (1983, JAR): The impact of merger-related regulations on the shareholders of acquiring firms 1969 reform act imposes tax penalties on financing acquisitions with debt and increases the capital gains tax from 25-30 % ? decreasing after tax returns to sellers in acquisitions Hypothesis: Negative reaction around the events that led to adoption of reform act for firms with on-going acquisition programs. Results consistent with hypothesis.

    9. Contemporaneous events- H1 Measuring abnormal returns on event dates Standard methodology: Rit = a + b Rmt+ K=9, N=[106 firms * T=daily returns 1984-1989] Econometrically weak 106 firm specific regressions of above model 106 market model regressions pre-event Ri = a + ßRm ? R –

    10. Event studies Contemporaneous events-H1 Preferred methodology:Schipper and Thompson (1983) Rp is the return of portfolio p on day t (p=1,2) N= number of days in the period Accounts for cross-sectional heteroskedasticity and contemporaneous correlation Disadv: Restricts coefficients

    11. Event studies Contemporaneous events –H2 Hypothesis 2: The market reaction differs cross-sectionally based on firm characteristics Armstrong, Barth, Jagonlinzer and Riedl, 2007 CARj,e = ß0 + ß1 ADRj,e + ß2 Turnoverj,e + ß3 Closely_Heldj,e + ß4 Herfj,e + ß5 Codej,e + ß6 Big4j,e + ß7 Bankj,e + ?j,e CARj,e= market adjusted (market is global index) 3-day return for firm j and event e.

    12. Event studies Contemporaneous events –H2 Armstrong, Barth, Jagonlinzer and Riedl, 2007 Expectations: ADR = (kind of ADR?) Info asymmetry proxies: Turnover (shares traded/outstanding shares) =1 if greater than median and 0 otherwise Closely held shares Herfindahl index (industry concentration the closer to 1) Code Law: They expect a negative ? Big 4: They expect a positive coefficient ?

    13. Event studies Contemporaneous events –H2 Li, Pincus and Rego, 2006: SOX H2: Firms with previous earnings management will earn more positive (negative) abnormal returns on the events that increased (decreased) probability of adoption CAR= { EM, AUD Dependence, Non audit fees, size, BM, beta, industry} Each event separately. Compute t-test for the mean (exclude negative events) Results consistent with expectations

    14. Event studies Contemporaneous events –H2 The economic consequences of Regulation Fair Disclosure: Irani and Karamanou Reg FD -- Passed to combat Selective disclosure Abercrombie & Fitch warned a WS analyst about disappointing earnings before making info. public With the opening of the trading session on NYSE the stock of Electronic Data Systems Corp. plummeted – Some analysts admitted having the bad news the night before the public release. GM up 3.2% and Lehman Brothers up 6.8% after company officials informed certain analysts of positive news

    15. Event studies Contemporaneous events –H2 Whenever an issuer or a person acting on its behalf discloses material nonpublic information to certain enumerated persons the issuer must make public disclosure of the information either simultaneously if the act was intentional or promptly if it was not intentional. Enumerated persons: sell-side analysts, buy-side analysts, large institutional investment managers.

    16. Event studies Contemporaneous events –H2 Expected benefits Effects similar to insider trading ? less liquid markets Fairer disclosure; increased investor confidence and liquidity; reduced cost of capital. Reduce bias in analyst forecasts Expected costs Chilling of information “The playing field will be more level, but it will be empty”

    17. Event studies Contemporaneous events –H2 To examine the anticipated effects of Reg. FD captured by the market reaction to the events that led to its adoption. Motivation : debate and policy implications Assumption: Market reaction a good indication of market’s expected long-term effects. But market’s initial assessment may not reflect actual effects Timely first indication -- actual long-term effects need for longer time-series data

    18. Event studies Contemporaneous events –H2 H1: The greater the net benefits from elimination of s.d. the more positive is the market reaction to events leading to the adoption of FD Benefits are lower for firms with rich information environments: SIZE (-), ANALYST FOLLOWING (-), DISPERSION (+) Benefits are greater if greater propensity of selectively disclose information Following (+), Dispersion (+), Institutional ownership (+)

    19. Event studies Contemporaneous events –H2

    20. Event studies Contemporaneous events –H2

    21. Event studies Contemporaneous events –H2 Method: Standard methodology: Obtain CAR on events (e.g. market model as before) Regress CAR on set of variables separately for each event Issue with contemporaneous events: cross-sectional heteroskedasticity and cross-correlation

    22. Event studies Contemporaneous events –H2 Sefcik and Thompson (1986 JAR) Construct portfolio returns for each day in the period using as weights each one of the explanatory variables F = [1, SIZE, FOLL, DISP, IO3] Run p=5 equations. N=Number of days (1/1/99-31/12/00) 3 event dates Accounts fully for heteroskedasticity and cross-correlation

    23. Event studies Contemporaneous events –H2

    24. Event Studies Firm specific event dates Not all events happen on the same day Earnings announcements Cross-listing announcements IFRS voluntary adoption announcements Restatements Repurchases (share buy backs) Mergers and Acquisitions Analyst recommendation changes

    25. Event Studies Firm specific event dates H1: The event results in positive (or negative) abnormal returns (EA, Restatements, M&As, Recommendation downgrades) (short vs. long window studies) Note that cross correlation not much of concern in this setting. Why? Miller, 1999 (JFE) Examines the announcement of the intention to cross list in the US 181 announcements, 35 countries Period: 1985-1995

    26. Event Studies Firm specific event dates – H1 Miller 1999: Market model adjusted returns: -125 to -26 mean abnormal returns on each of the three days around the event (across sample firms) Positive and significant return on -1,0 Tests frequency of the observations with positive returns (significant for day -1) Segmentation argument Other?

    27. Event Studies Firm specific event dates – H2 H2: The market reaction to the event is related to firm characteristics Ball and Brown (1968, JAR) Market returns and accounting earnings on announcement Returns are associated with unexpected earnings with a Drift UE : Random walk Analyst forecasts (mean vs. median, period, deflators)

    28. Event Studies Firm specific event dates – H2 Miller 1999 3-day firm specific CAR Regressed on: OTC, NYSE, Emerging economy dummies T-stats adjusted for heteroskedasticity Results: More positive reaction if exchange listed (vs. OTC. vs. 144A), and if emerging economy Alternative explanations?

    29. Event Studies Firm specific event dates – H2 The Valuation Effects of Firm Voluntary Adoption of International Accounting Standards : Irene Karamanou and George Nishiotis RQ: What are the valuation effects of the corporate decision of a firm to voluntarily adopt IAS? We investigate the price reaction at the announcement of the IAS adoption and conduct a cross sectional analysis of the abnormal returns. Constant regulatory environment

    30. Event Studies Firm specific event dates Increased disclosure, reduces cost of capital, increases firm value IAS is superior to local GAAP (Ashbaugh and Pincus, 2001; Barth et al., 2005; Ding, Hope, Jeanjean and Stolowy, 2005) H1: There are positive abnormal returns around the announcement of voluntary IAS adoption.

    31. Event Studies Firm specific event dates Sample construction 564 firms from Global Vantage using IAS for at least 1 year in the period 1989-1999 Kept the ones that switched from local GAAP to IAS voluntarily Additional 53 firms from IASB list of fiscal years1999/2000. 171 potential firms Searched for announcement dates (Lexis-Nexis, Factiva, email). Sufficient time series of daily returns for the underlying stocks and their national indices. 54 firms

    32. Event Studies Firm specific event dates

    33. Event Studies Firm specific event dates Method Market model per firm (-150; -26) Daily returns denoted in local currency, Datastream Market index fromDatastream Abnormal returns are averaged across firms ? Abnormal return on each day If multiple announcements the earliest clear announcement is used

    34. Event Studies Firm specific event dates

    35. Event Studies Firm specific event dates Explaining firm abnormal returns: H2: the greater a firm’s undervaluation prior to the IAS adoption announcement, the higher the abnormal return. – signaling and bonding Tobin’s q (+ or –) H3: the higher the growth opportunities prior to the IAS adoption announcement, the higher the abnormal return. – bonding effects Sales growth ( +) H4: the poorer the information environment prior to the IAS adoption announcement, the higher the abnormal return. – investor protection pre adoption, Foll, (-) ; DIAS (+) ; AntiDir ( -) ; Effic ( –) ;

    36. Event Studies Firm specific event dates

    37. Event Studies Firm specific event dates

    38. Event Studies Firm specific event dates Espahbodi, H., E. Strock, H. Tehranian. 1991. Impact on equity prices of pronouncements related to nonpension postretirement benefits. Journal of Accounting and Economics 14: 323-346 Issues: Confounding events Low R2s Returns should be computed manually – Adjust for splits and stock dividends Market adjusted returns

    39. Event studies Armstrong, C., M. E. Barth, A. D. Jagolinzer, E. J. Riedl. 2007. Market reaction to the adoption of IFRS in Europe. Working paper, Harvard Business School Ball R. and P. Brown. 1968. An empirical evaluation of accounting income numbers. Journal of Accounting Research: 158-178 Miller, D. P. 1999. The market reaction to international cross-listings: evidence from Depositary Receipts. Journal of Financial Economics 51: 103-123 Li, H., M. Pincus, S. O. Rego. 2006. Market reaction to events surrounding the Sarbanes-Oxley Act of 2002 and earnings management. Working paper, University of California, Irvine. Schipper, K. and R. Thompson. 1983. The impact of merger-related regulations on the shareholders of acquiring firms” Journal of Accounting Research 21:184-221 Sefcik, S. E. and R. Thompson. 1986. An approach to statistical inference in cross-sectional models with security abnormal returns as dependent variable. Journal of Accounting Research 24: 316-334

More Related