william a. reese, jr. russell p. robins a. b. freeman school of business tulane university fea...

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PERFORMING AN EVENT STUDYAN EXERCISE FOR FINANCE STUDENTS

William A. Reese, Jr.Russell P. Robins

A. B. Freeman School of BusinessTulane UniversityFEA ConferenceSept. 25, 2015

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WE TEACH OUR STUDENTS: When there is an announcement of a

corporate acquisition, the price of the firm being acquired usually goes up. The price of the firm making the

acquisition usually goes down When an analyst upgrades a stock, it

usually goes up in price Initial Public Offerings (IPOs) of

common stock are usually underpriced.

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WE TEACH OUR STUDENTS: It is difficult to make money based on some

surprising economic data a day or two after the data has been released.

Historically, on average, small-cap stocks do well in the month of January.

There are various types of momentum in stock returns (weekly, monthly, longer)

Investors tend to put more money into mutual funds that have recently performed well.

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EVENT STUDIES

Each of these facts have been found by researchers through Event Studies

Plotting Cumulative Abnormal Returns (CARs) make Event Studies easy to explain and understand

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M & A ANNOUNCEMENTS

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REACTION TO CNBC REPORTS

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NAME CHANGE

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CLASSROOM EVENT STUDIES We teach the facts We show the graphs We don’t teach the methodology

It can be complex We don’t have students do their own

Event Studies What to do? Time consuming

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OUR EVENT STUDY

Investments Course Undergrad or MBA Easy to Perform Easy to Understand Predictable Results

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OUR EVENT STUDY

Are there abnormal returns when a stock is added to the S&P 500?

Is there abnormal trading volume?

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SHOULD WE EXPECT ANYTHING?

Since October 1989, S&P has been announcing (when possible) changes to the index one week prior to the effective date

Index funds MUST buy the stock May create upward price pressure

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OUR DATA

Every stock that was added to the S&P 500 between January 2000 and July 2015. Purged to leave 270 stocks that are still listed on Yahoo! Finance

Date of addition Ticker symbol

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OUR SPREADSHEET

Macro that obtains data from Yahoo! Finance for stocks the student selects and S&P 500

42 days before the listing date 10 days after the listing date

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OUR SPREADSHEET

Event window is day -10 to day +10

Returns for stock and S&P are calculated for 30 days prior to event window “Calculation Period”

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THE MARKET MODEL A regression estimates alpha and beta

for each stock during calculation period:

Ri= α + β(RMkt) + e. These estimates are used to calculate

risk-adjusted expected returns during the event window:

E(R)= α + β(RMkt)

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THE MARKET MODEL Abnormal returns are calculated: Abn. Ri = Ri - E(Ri)

Cumulative Abnormal Returns (CARs) are the sum of all abnormal returns up to time t in the event window

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THE MARKET MODEL Cumulative Abnormal (Scaled) Volume

is also calculated for the event window Average volume during calculation period

is established as “normal” volume

CARs and CAVs are averaged across stocks in the sample and T-stats are calculated.

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TYPICAL RESULTS

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TYPICAL RESULTS

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WHAT THE STUDENTS DO Select a random set of stocks from our list Enter their ticker symbols into spreadsheet Click “Download” Wait a couple of minutes

Depending on internet speed and number of stocks selected

Observe and analyze the results Answer prepared questions Come up with their own idea for an event

study

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THE STUDENTS WILL LEARN: How an event study is done How to calculate risk-adjusted returns

using the market model How to calculate and plot CARs Reinforcement of averages, standard

errors, t-stats, and statistical significance

How buying pressure can affect returns and volume

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LOCATION OF SPREADSHEET The Spreadsheet and basic instructions

can be found at http://info.freeman.tulane.edu/breeseemba/eventstudy.htm